How to Invest in Global Sector Funds
Find the Best Global Sector Funds
There are many different strategies for investing in global markets, ranging from traditional value investing in individual assets to global macro investing in country funds. Sector funds provide a great way to build global exposure to specific sectors into a portfolio while maintaining a diversified portfolio of equities. International investors may find these funds to be a compelling alternative to domestic sector funds.
In this article, we will look at what global sectors funds are, how to invest in global sector funds, and some other important considerations for international investors.
What Are Global Sector Funds?
Global sector funds are mutual funds or exchange-traded funds (ETFs) that are composed of equities within a given industry. Unlike international funds, these global funds may include significant (up to 70 percent in some cases) exposure to the United States. This means that they often compete with domestic sector funds rather than complement them. But, they’re much easier than investing in individual American Depositary Receipts (ADRs) or foreign stock.
The most popular option for ETF investors are the iShares Global Sector ETFs, which include:
- iShares Global Infrastructure ETF (IGF)
- iShares Global Healthcare ETF (IXJ)
- iShares Global Tech ETF (IXN)
- iShares Global Energy ETF (IXC)
- iShares Global Consumer Staples ETF (KXI)
- iShares Global Financials ETF (IXG)
- iShares Global REIT ETF (REET)
- iShares Global Gold Miners ETF (RING)
- iShares Global Metals & Mining Producers ETF (PICK)
- iShares Global Telecom ETF (IXP)
- iShares Global Materials ETF (MXI)
- iShares Global Timber & Forestry ETF (WOOD)
- iShares Global Consumer Discretionary ETF (RXI)
- iShares Global Industrials (EXI)
- iShares Global Utilities (JXI)
- iShares Global Clean Energy ETF (ICLN)
Mutual fund investors have many other options when it comes to global sector funds, including actively-managed funds that take an opinionated approach.
Some popular global sector mutual funds include:
- T. Rowe Price Global Technology Fund (PRGTX)
- Lazard Global Listed Infrastructure Portfolio (GLIFX)
- Vanguard Health Care Fund (VGHCX)
International investors may want to visit mutual fund providers, such as Vanguard, to find the best global sector mutual funds for their portfolios.
Reasons to Invest in Global Sector Funds
There are many reasons that investors may want to consider global sector funds rather than domestic sector funds.
The first key benefit is that it provides a greater level of diversification from country-related risk factors that could jeopardize sectors. For instance, a domestic infrastructure fund may depend on the U.S. government’s spending while a global infrastructure fund is not dependent on any single government. The international global infrastructure fund may also benefit from greater spending in emerging market countries like China or India.
The second key benefit is that global sector funds are a simpler alternative to investing in individual international equities.
For example, an investor could have a lot of trouble building a portfolio consisting of ADRs and foreign stocks compared to buying a fund that’s trade on a U.S. exchange and already fully-diversified around the world. The global sector fund is also easier to maintain than an entire portfolio of individual stocks that need rebalancing.
Risk Factors and Other Considerations
Global sector funds provide many benefits, but there are also some drawbacks that investors should carefully consider before investing in them.
The biggest drawback is that global sector funds tend to have a higher expense ratio than domestic sector funds. After all, it’s more expensive to build and maintain an international portfolio of stocks relative to a domestic portfolio. These expenses can eat into potential returns over time and have a significant impact on a portfolio’s profitability.
Investors may want to consider lower cost ETFs to combat these higher expenses.
A second drawback is that global sector funds may be exposed to foreign investment risk. For instance, a global infrastructure sector fund may have significant exposure to Chinese infrastructure related equities. A collapse in China’s infrastructure spending—due to governmental changes—could lead the fund to lose significant value, whereas a domestic infrastructure fund wouldn’t experience that risk.
The Bottom Line
Global sector funds provide a great way for investors to broaden their exposure to specific sectors, such as technology, healthcare, or infrastructure. Unlike domestic-only funds, global sector funds may provide greater diversification and opportunities for higher risk-adjusted returns over time. Internationally-minded investors may want to consider replacing domestic sector funds with global sector funds to realize these benefits.