International stocks have handily outpaced the U.S.-dominated S&P 500 over the past five years. Three major events have particularly boosted international stock markets since the turn of the century:
- Integration of the euro into world markets.
- Stabilization of emerging market economies.
- Growth of capitalism in Eastern Europe.
If you've had 100% of your stock portfolio tied up in U.S. domestic stocks during this time, you've missed out on pretty dynamic growth.
Just how dynamic?
The MSCI EAFE Index, which tracks publicly traded companies in Europe, Australia, and the Far East (hence "EAFE") and includes international stalwarts such as Vodafone (NYSE:VOD), BP (NYSE:BP), Novartis (NYSE:NVS), and Total SA (NYSE:TOT) among its ranks, has returned 13.8% annually over the past five years. By comparison, the S&P 500 has returned 6.3%.
That outperformance isn't exclusive to large caps. Mid- and small-cap international stocks have also had tremendous returns over the past half-decade.
A case study
The Vanguard International Explorer Fund (VINEX), which invests in small international companies, has returned 22.5% per year since 2001. 22.5%! And I'd bet you've never even heard of its top holdings:
|
Company |
Headquarters |
|---|---|
|
Sika Finanz AG |
Switzerland |
|
Topdanmark |
Denmark |
|
Hochtief |
Germany |
|
Swedish Match |
Sweden |
|
Geberit |
Switzerland |
|
Red Electrica de Espana |
Spain |
|
BKW FMB Energie |
Switzerland |
|
Groupe Bourbon |
France |
|
Bilfinger Berger |
Germany |
|
PubliGroupe |
Switzerland |
Pretty amazing, right? Well, I have some good news and some bad news.
Bad news first
None of these 10 trades on a major U.S. exchange.
Some, however, are available as pink-sheet issues, but you take on added risk trading on the over-the-counter markets because they lack the regulation of the larger exchanges and have almost no liquidity.
Now the good news
Although many small international companies aren't traded on major U.S. exchanges, you can still add some to your portfolio. One way is to buy an international small-cap fund such as Vanguard International Explorer.
You can also go hunting for the international small caps that do trade on major U.S. exchanges (as ADRs). Petroleum Geo Services (NYSE:PGS), NICE Systems (NASDAQ:NICE), and Consolidated Water (NASDAQ:CWCO) are a few stocks that fall into this camp.
The Foolish bottom line
No matter which road you take, now is a crucial time to add international stocks to your portfolio. Whether you've got a long time horizon or a short one, the growth potential and diversification benefits that foreign equities offer are just too good to pass up. Even Vanguard's ultra-conservative Target Retirement Income Fund (VTINX), which is designed for retirees, has 6% of its portfolio devoted to international equities.
If you're interested in adding some international plays to your portfolio but are worried about the risks and complexities associated with the global markets, give our new Motley Fool Global Gains investing service a test-drive. The Global Gains team -- led by Fool senior analyst Bill Mann -- has made it their mission to find quality stocks from around the world.
You can read the team's two inaugural picks and their country-specific research with a 30-day free guest pass. Just click here to get started.
Todd Wenning does not own shares of any company mentioned. Vodafone is an Inside Value selection. Total SA is an Income Investor choice. The Fool is investors writing for investors.
