An international fund can help investors diversify their portfolios and participate in rapid growth in other countries, but the funds pose a special set of risks. How can you decide if an international fund right for you? Start by weighing the pros and cons.
An international fund can enable you to benefit from bullish markets overseas, according to T. Rowe Price, a mutual fund company whose offerings include international stock and bond funds. “If you focus your portfolio solely within the U.S., you’re excluding a major portion of the world’s investment opportunities,” said T. Rowe Price, “not to mention some fast-growing and innovative companies.”
Nearly 60 percent of the world’s stock investment opportunities, as measured by market capitalization, lay outside the United States – a far cry from the post-World War II days when the U.S. dominated the world economy, said T. Rowe Price. Today, eight of the 10 largest car manufacturers are domiciled overseas, as are eight of the 10 largest diversified telecommunications companies and seven of the 10 largest metals and mining companies. Foreign companies also represent seven of the 10 largest electronic equipment and instrument companies, and six of the 10 largest household durable companies.
Affluent investors tracked by Millionaire Corner are positioned to take advantage of growth overseas, but favor domestic equities over foreign investments. High net worth investors surveyed in the fourth quarter said that in the coming year they were most likely to invest in equities (63 percent), cash (51 percent) and fixed-income products (47 percent). International investments are likely to attract about one-third (35 percent) of high net worth individuals, who have investable assets of $5 million to $25 million.
High net worth investors prize diversification, a key advantage of international investing, and a significant share are willing to tolerate the unique risks posed by an international fund. (About half of high net worth investors (48 percent) own international mutual funds for an average balance of $216,000.)
Investors can also gain exposure to foreign markets through an Exchange Traded Fund, or ETF, according to the NASDAQ, which notes that an international ETF allow investors to hold a broadly based portfolio of international shares “with a smaller investment and less complication than directly purchasing shares.”
An international fund –either a mutual fund or ETF – can be vulnerable to political unrest or economic instability abroad, particularly in emerging markets, said T. Price Rowe. An international fund is also subject to currency risk that can decrease the dollar value of an investment even if pricing remains unchanged.