Many U.S. investors commit almost all of their stock portfolios to American companies. That's only natural, because it's easier to feel comfortable investing in the companies with which you're most familiar. Yet foreign stocks can both diversify your overall portfolio and open up opportunities for growth and outperformance. In particular, there are three methods you can use to make your portfolio more international in its exposure.
Whether you invest directly in foreign stocks, use internationally focused exchange-traded funds, or seek out multinational corporations that are headquartered in the U.S. but do almost all of their business overseas, committing to having true international exposure in your investments is a smart move that can enhance your overall returns.
In general, there are three ways you can invest internationally:
- Investing directly in foreign stocks.
- Using internationally focused exchange-traded funds to gain foreign exposure.
- Buying shares of multinational corporations that are based in the U.S. but do almost all of their business internationally.
We'll look at each of these options.
Image source: Getty Images.
Buying foreign stocks directly
The most obvious way to invest internationally is to buy shares of foreign companies. In some cases, this is quite easy, because many foreign companies list their stock on major U.S. exchanges like the New York Stock Exchange or the Nasdaq Stock Market. Investing in those companies is identical to buying shares of any U.S. company, and investors benefit from these companies typically having to comply with U.S. regulatory and financial disclosure rules.
For stocks that aren't listed on major U.S. exchanges, investing gets trickier. Some foreign companies trade on an over-the-counter basis, which makes them available with many brokerage accounts but also makes them subject to less liquid trading conditions. Still other foreign stocks have no U.S. availability at all, forcing would-be investors to buy shares directly on foreign stock exchanges. Only limited numbers of brokers offer direct purchase and sale of foreign stocks on exchanges outside the U.S., so you can't necessarily count on finding the exact stock you're looking for without a great deal of effort.
Buying international stocks through an ETF
You can find many exchange-traded funds that focus on foreign stocks. These vehicles offer a more diversified approach at international investing, with a wide variety of different funds to choose from. Some international ETFs seek to offer a cross-section of the entire global stock market, while others focus in on specific regions, countries, industries, or other classifications of international stocks. One of the most common distinctions involves ETFs that focus on stocks in developed markets versus those that concentrate on emerging market stocks. Many ETFs limit themselves to one or the other of these groups.
The advantage of international ETFs is that they're listed on U.S. stock exchanges and are easy to trade. Fees can be higher than you'll find with domestic stock ETFs, so look closely at costs before you choose an international ETF.
Buying U.S. stocks that concentrate abroad
Finally, many U.S. companies have dramatically increased their exposure to international markets over the past 20 years. With growth rates internationally often exceeding what a business can generate in mature U.S. markets, staking out a global presence has become increasing popular for U.S. multinationals.
A few companies are almost entirely outward facing. For instance, Philip Morris International only sells cigarettes and other tobacco products outside the U.S., leaving the domestic market to its former parent company. In other cases, companies maintain a minimal U.S. presence, but the nature of their business makes opportunities more readily available internationally.
Even the most iconic U.S. companies now often have a major international presence. To get a sense of how global a company is, annual reports will usually break down revenue and profit sources geographically. As American companies gain notoriety abroad, especially in the consumer sector, more of their revenue is likely to come from outside the U.S., and that leaves investors having to consider not only U.S. economic and industry conditions but also what companies face in their overseas markets.
Don't be afraid
Investing internationally is a smart move for investors because it can reduce overall risk and give you a greater cross-section of the entire global business world. Whether you buy foreign stocks directly, use ETFs, or seek to profit from U.S. multinationals, being aware of international opportunities will make you a better investor.
