The Cheap and Easy Way to Invest Globally

To find great stocks in the strongest economies on Earth, many investors are taking their money outside the U.S. and going where the growth is. If you're looking for international stocks in the fastest-growing countries, you can find everything you want at bargain prices -- all from a single investment.

With dozens of new international exchange-traded funds focusing on world markets having come out in recent years, closed-end mutual funds haven't been in the spotlight much lately. But that lack of attention is good news for new investors looking to pick up international stocks on the cheap.

The quirks of closed-end funds
The secret behind closed-end bargains is in the unusual way that they trade. Unlike regular ETFs and mutual funds, closed-end fund shares trade only in the secondary market. The market price of closed-end funds therefore can be a lot different from the value of the investments they own, which is also known as net asset value.

In recent years, the limited supply of international closed-end funds led to substantial premiums for certain funds focusing on hot markets such as China and India. Often, closed-ends were the best way to get exposure to companies such as Baidu.com (Nasdaq: BIDU  ) and Infosys (Nasdaq: INFY  ) . As ETF alternatives became available, however, these premiums largely disappeared. Now that international stock markets have slumped amid fears of a global slowdown, many of these funds now trade at big discounts to their net asset values.

Big names at lower prices
Whether international closed-end funds will appeal to you depends on what type of stocks you're interested in. If you want to own small, up-and-coming foreign companies that institutional investors typically ignore, you're out of luck, because you won't typically find them in closed-end funds. As you can see below, closed-end funds usually focus on the largest, best-known companies within a given area -- names you'll also see in international ETFs.

Fund

Discount to Net Asset Value

Top Holdings

Latin American Discovery Fund (LDF)

5.54%

Petroleo Brasileiro (NYSE: PBR  ) , Vale (NYSE: RIO  )

Morgan Stanley Emerging Markets Fund (MSF)

7.86%

America Movil (NYSE: AMX  ) , China Mobile (NYSE: CHL  )

First Israel Fund (ISL)

4.14%

Teva Pharmaceuticals (Nasdaq: TEVA  )

Some funds offer even bigger bargains. Even though discounts have narrowed during the past year, many funds still offer discounts exceeding 10%.

Although closed-end funds own plenty of big-name companies that are available to investors through American depositary receipts, many foreign stocks don't trade on U.S. stock exchanges. For markets that don't yet have country-specific ETFs, a closed-end fund is often the easiest way to get exposure to these stocks.

Paying for value
The benefits of closed-end funds don't come free, however. You have to be extremely careful with fund-related costs, because many closed-end funds charge relatively high fees and expenses. With expense ratios exceeding 2% in some cases, it pays to choose carefully.

In addition, although you can often buy fund shares at a discount to net asset value, there's no guarantee that the discount won't be even wider when you sell. A widening discount reduces the market price you get when you sell your shares. If the discount widens enough, you can end up losing money even if the fund's net asset value goes up.

Nevertheless, for those who can't pass up a bargain, buying discounted closed-end fund shares offers an opportunity you won't find very often. When those discounts narrow or even turn into premiums, you can earn profits well beyond your fund's portfolio returns.

For more on global investing, read about:

At Motley Fool Global Gains, we're all about finding the most promising companies on the planet and bringing them to your attention. See for yourself what Global Gains has to offer with a 30-day free trial.

Fool contributor Dan Caplinger owns some foreign closed-end funds, but neither the funds nor companies mentioned in this article are currently in his portfolio. Petroleo Brasileiro is a Motley Fool Income Investor pick. Baidu.com is a Motley Fool Rule Breakers recommendation. Try any of our market-beating newsletters free for 30 days. The Fool's disclosure policy goes around the world for you.


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