Exchange-traded funds are a great way to get diversified exposure in just about any type of investment you'd be interested in owning. ETFs tend to have low costs, and whether you're interested in broad-based investing across an entire asset class or a very focused investment approach into a particular niche of the financial markets, you'll generally be able to find an ETF that will meet your needs.
Coming into 2019, investors have seen volatility pick up dramatically in the U.S. stock market, and that's made many people look more closely at overseas markets as an alternative. Investing abroad can be challenging, but there are ETFs that make the process a whole lot easier. Below, you'll see three top international ETFs that have proven themselves over the long run, and even though their performances in the recent past haven't been everything investors would want to see, they have a lot of promise for 2019 and beyond.
|
International ETF |
Assets Under Management |
Expense Ratio |
3-Year Total Return |
|---|---|---|---|
|
Vanguard FTSE Emerging Markets (VWO 2.66%) |
$55.3 billion |
0.14% |
26% |
|
iShares Core MSCI EAFE (IEFA 1.89%) |
$52.3 billion |
0.08% |
9% |
|
WisdomTree International Small-Cap Dividend (DLS 1.65%) |
$1.56 billion |
0.58% |
13% |
Data source: Fund companies.
The big question with international ETFs
The first question you have to address when looking at international ETFs is what type of exposure you want. International markets get divided into two categories: developed markets and emerging markets. Developed market international ETFs invest in companies that are based in the most industrialized nations across the globe, such as the U.K., Germany, France, Japan, Canada, and Australia. Emerging market international ETFs focus on companies in countries with faster-growing economies, especially China, India, and Brazil.
Most investors see developed markets as being less risky than emerging markets, but emerging markets arguably have the greater growth potential. That's because with a lot of room to grow toward fully industrialized status, emerging economies can provide huge boosts to the companies that end up being the leaders of their respective industries. In some cases, the winners in the competitive effort to dominate a given emerging market will be an outside multinational from the U.S. or somewhere else in the developed world. But often, domestic competitors have an edge that will result in a better reception from customers within the emerging-market nation.
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2 big ETFs for all-purpose international investing
Once you've chosen between developed or emerging markets, you can find many different ETFs that serve them. Among the largest in the emerging market world is Vanguard FTSE Emerging Markets, which invests in companies from more than a dozen countries around the world. China has the largest allocation within the fund, with more than a third of its assets invested in Chinese stocks, with conglomerate Tencent Holdings being the largest single stock position. Taiwan, India, and Brazil are the next-biggest target countries, together making up another third, and smaller players like Thailand, Russia, Malaysia, and Mexico all have meaningful allocations. An expense ratio of 0.14% is relatively cheap for emerging-market funds, and although returns have dramatically lagged U.S. markets, the Vanguard emerging market ETF has managed to reward investors over the longer run.
Meanwhile, on the developed market side, iShares Core MSCI EAFE stands out as a good low-cost choice. iShares actually has another ETF that has a very similar investment objective, but it's designed more for institutional investors and has expenses that are four times as high. The core ETF tracks one of the most popular international indexes, investing about 25% of the fund's assets in Japanese stocks. The U.K. weighs in at 17%, and combined, exposure to Western European stocks adds up to about 40%. Every industry group of the market is represented, with financials, industrials, and consumer stocks getting the biggest allocations. Swiss food giant Nestle is the biggest holding, but among the top 10, you'll find well-known companies in the healthcare, banking, energy, and auto industries.
Thinking smaller
The two ETFs above focus on large-cap stocks, but for those seeking smaller companies, the WisdomTree International SmallCap Dividend ETF does a good job of fleshing out a diversified portfolio. The fund invests almost exclusively in developed-market stocks, with over half the fund made up of positions in countries based in Japan, the U.K., and Australia. Industrial and consumer stocks have the most money allocated to them, but the fund is well-diversified across most sectors.
Especially noteworthy is WisdomTree's emphasis on dividend-paying companies, with an unusual weighting mechanism that puts more money into the stocks that are most generous in paying dividends to shareholders. The WisdomTree approach comes with a more expensive set of fees, due in part to the challenge of investing in international small-caps compared to their more liquid large-cap counterparts. Overall, the fund has held its own and offers a way to balance large and small companies within your international investing portfolio.
Watch for a surge
After a relatively tough 2018 for global stocks, international ETFs are hoping to return to their long-term success trajectory in 2019 and beyond. Investors looking to take advantage of global opportunities can use these three ETFs to capitalize on what will hopefully be a healthy rebound for markets around the world.
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