How to Invest in Foreign Markets with ETFs

6 ways you can use ETFs for your international investment strategy.

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Investors are always looking for ways to increase their market exposure and capitalize on profitable opportunities. International investing is an option available for investors looking to take on a little more risk.

International investing allows investors to diversify their investments by region; or increase or decrease exposure to emerging, stable, or growing foreign investment types. Foreign exchange-traded funds (ETFs) are efficient and beneficial assets for your portfolio—and they allow you to gain instant investing access in foreign markets.

Here are six types of international ETFs you can use to diversify and increase your portfolio.

Key Takeaways

  • Foreign market ETFs include funds from specific countries or broader regions if you want to focus your investments geographically.
  • Emerging market ETFs are based on securities from countries in periods of rapid growth, which may include a degree of risk.
  • International bond ETFs and commodity ETFs can both be used to hedge foreign risk in your portfolio.
  • Currency ETFs are inherently risky and come with a layer of complexity due to exchange rates, but can be used to protect against bond inflation.

Specific Foreign Market ETFs

If you’re looking to target a specific country in your investing strategy, a foreign market ETF might be the best fit. Market ETFs track the overall performance of a country’s financial situation by tracking an index from that country's exchanges.

The indexes usually consist of a selection of stocks necessary to the economic climate of the market. An overall change in the index (or the companies included) generally indicates the country’s fluctuating financial situation.

Ensure the specific market you choose is politically stable. Civil unrest is one of the many factors that can shut a market down and cause prices to plummet.

For example, EWG—the iShares MSCI Germany Index ETF, tracks the MSCI Germany Index. The index contains companies in German sectors such as information technology, utilities, financial and others. Significant changes to or trends on the index would indicate that the economy is in flux.

While it is possible to invest in the index by purchasing shares yourself, ETFs offer benefits over direct investing—such as lower trading fees and tax benefits.

Broad Foreign Market ETFs

While some market ETFs focus on a specific country or region, other ETFs are more inclusive. For example, a BRIC investment will include securities deriving from Brazil, Russia, India or China. So if you are looking to invest in one or more of these countries, a BRIC ETF like BKF iShares MSCI BRIC Index ETF may be one way to do so.

There are other broad market ETFs besides BRIC products as well. There are Asia ETFs, Europe ETFs, and even North America and Latin America ETFs.

Emerging Market ETFs

Emerging market ETFs are funds based on securities from countries with growth potential and low incomes, who are experiencing rapid social change. The countries considered emerging are listed on the Morgan Stanley Capital International Emerging Market Index (MSCI).

Similar to foreign market ETFs, emerging market ETFs have broad and specific markets to choose from. If an investor thinks there is potential profit in a particular country or a general region, an emerging market ETF might be a sound investment.

Broad market emerging emarket ETFs that focus on distinct regions can help you achieve some consistency.

One choice for a specific country emerging market ETF is the Global X MSCI Colombia ETF (GXG). You could also choose a broad emerging market ETF that tracks most emerging countries like the iShares Core MSCI Emerging Markets ETF (IEMG).

International Bond ETFs

Another way to invest in foreign markets is with international bond ETFs. Not only do bond ETFs increase your exposure to foreign regions, but they can also create a fixed-income stream for your portfolio.

International bond ETFs benefit international investors in that they can help hedge foreign stock ETF risk. If you need upside or downside protection for your portfolio’s global stock risks, you may want to look into foreign bond ETFs.

Foreign Currency ETFs

As with other foreign ETFs, currency ETFs can track a specific country or a collection of currencies. However, foreign currency investing is notoriously risky. Currency ETFs can mitigate much of this risk if the investor has more holdings based in their own country because exchange rate risk is reduced.

To successfully invest in currency, it helps to understand risks such as sovereign defaults, GDP rate, unemployment rates, corruption, natural resources and other economic factors. The CIA World Factbook provides relevant data for over 255 countries.

Additionally, since long-term bonds carry inflation risk, currency ETFs allow you to hedge foreign inflation risk in your portfolio.

Commodity ETFs

Most investors think that commodities are a general or domestic investment, but that’s not the case. Like foreign ETFs, you can use a commodity ETF to gain international exposure or hedge foreign risk in a portfolio.

For example, if you have investments in a country where the chief outsource is coal, you could use a coal ETF to offset risk from other investments in that country. If a country is developing alternative energy sources to combat the looming energy crisis, a solar energy ETF might be an investment that pays dividends on a global scale.

Utilizing a commodity ETF as a foreign investment is an advanced strategy. However, with the proper application, it can be very effective for investors and traders alike.