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Investing in International Stocks

Updated: Dec. 7, 2021, 1:52 p.m.

Whether you’re looking to strengthen your portfolio through diversification or create new avenues to explosive growth, international stocks can be an excellent component in your overall investment portfolio. Rapid expansion for international economies, increasing productivity, and improving standards of living are leading to the rise of a new global middle class, and these trends suggest that the world’s most dramatic economic growth over the next century will occur outside the United States. Allocating a percentage of your portfolio to stocks in international markets is a move many investors should strongly consider.

International stocks to watch

World map showing each stock near the country out of which it is based.

Image by The Motley Fool

1. JD.com

China accounts for roughly half of global e-commerce spending, and its online retail market looks poised for substantial long-term growth. JD.com (NASDAQ:JD) is China’s second-largest online retailer, trailing only Alibaba (NYSE:BABA), the country’s largest business-to-consumer seller. It’s also a business that’s sufficiently differentiated from competitors, thanks to its focus on high-quality products and unmatched fulfillment infrastructure.

2. Yandex

Yandex (NASDAQ:YNDX) is sometimes referred to as “the Google of Russia” because its core business revolves around search engine and digital advertising services. Yandex is one of Russia’s leading artificial intelligence companies, and it also operates rideshare and food delivery businesses, social networks, video platforms, and cloud services.

3. StoneCo

Brazil-based payment-processing company StoneCo (NASDAQ:STNE) is benefiting from the shift away from physical money in favor of digital payments -- or, as it’s sometimes called, “the war on cash.” Brazil’s population of roughly 214 million gives StoneCo a large base of potential users, and the company has the opportunity to expand its services elsewhere in Latin America and South America as the digital payments market grows.

4. Shoprite Holdings

Africa is on track to account for more than half of global population growth through 2050, according to the United Nations, and Shoprite Holdings(OTC:SRGH.Y) status as the continent’s largest grocery chain positions it to benefit from economic and demographic tailwinds. The company is headquartered in South Africa and operates roughly 2,900 locations across 14 countries.

5. HDFC Bank

India's largest private sector lender, HDFC Bank (NYSE:HDB), is in a favorable position to benefit as the country’s economy continues to develop. The company has more than 5,600 branches across more than 2,900 cities and towns. HDFC is also a player in the digital payments space and appears poised to benefit from the war on cash.

Should I invest in international stocks & funds?

Foreign markets present opportunities that you miss if your holdings are strictly limited to U.S.-based stocks. While nondomestic companies sometimes come with added risks, international companies tend to be cheaply valued relative to comparable businesses in the U.S.

Many investors prefer to pay more for domestic stocks because business growth in international markets is considered less reliable than growth in the U.S. Another big factor is that most investors simply aren’t as familiar with opportunities in international markets because they have limited personal experience with nondomestic companies -- and because these businesses tend to receive less coverage from U.S. analysts and media outlets.

But with the vast majority of global population growth in coming decades projected to occur outside of the U.S., the associated demographic factors and the industrialization of relatively underdeveloped areas suggest that this century’s biggest economic growth will also happen outside the country.

As the world’s largest economy, the U.S. economy is likely to grow more slowly than countries with smaller, less-developed economies. While the U.S. has a population of roughly 330 million, India and China each have populations of roughly 1.4 billion people, and rising per-capita productivity could allow the economies of both of those countries to surpass the value of the U.S. economy by 2030.

Even a country such as Poland, which is home to roughly 38 million people and has actually seen its population shrink in recent years, could expand its gross domestic product (GDP) at rates that significantly exceed the growth rate of the U.S. GDP. Poland is benefiting from industrialization initiatives and a fast-growing tech sector, and, as with any economy with strong growth, likely creating conditions that benefit most Polish companies.

Of course, domestic companies are working to expand their presence in international markets and should profit from global growth. Investing in foreign stocks is a way to have a direct stake in growth outside the U.S. and to benefit from a broader range of market trends and opportunities.

How to trade foreign stocks in the U.S.

As an American, you can gain portfolio exposure to international stocks in a few different ways.

1. Invest in internationally focused funds

The easiest (and perhaps safest) way for you to invest in foreign stocks is by investing in exchange-traded funds (ETFs) or mutual funds that include nondomestic companies.

Buying shares of a fund such as the Vanguard FTSE Europe ETF (NYSEMKT:VGK) gives you a position in more than 1,300 companies on the continent, while the iShares MSCI Emerging Markets ETF (NYSEMKT:EEM) confers exposure to more than 1,200 large and mid-size companies from countries including China, India, Brazil, South Korea, and South Africa. Alternatively, a fund such as the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) mostly consists of U.S. companies, but Taiwan Semiconductor Manufacturing (NYSE:TSM) stock is one of its biggest components -- and the fund also includes foreign chipmakers ASML Holding (NASDAQ:ASML) and NXP (NASDAQ:NXPI), among others.

2. Buy American depositary receipts

Some foreign companies list their stocks on U.S. exchanges in addition to their home markets, in which case you can simply purchase shares on the Nasdaq or the New York Stock Exchange (NYSE) through domestic brokerages, just as you would for a U.S.-based company. These shares will usually be in the form of American depositary receipts (ADRs) and represent equity stakes equivalent to a predesignated number of shares of the company’s core stock on its home exchange. For example, an ADR share of the Chinese video-streaming company iQiyi (NASDAQ:IQ) trading on the Nasdaq is roughly equivalent to seven ordinary shares on the Chinese exchange.

You may also have the opportunity to buy ADR stakes in companies that don’t trade on U.S. exchanges through over-the-counter (OTC) markets accessible through your broker. But be aware that ADRs may not offer privileges such as voting rights that are conferred by owning a company’s home-market shares, so you may need to be willing to forgo the prospect of voting as a shareholder in order to acquire stakes in promising international companies.

3. Gain direct international access through a broker

The other main way to invest in foreign stocks is by using a brokerage to obtain direct access to the exchange where the company is listed. A global account with a participating U.S. brokerage is suitable, or you can establish a brokerage account in the country where you intend to trade.

Opening a global account or foreign brokerage account may cause you to incur fees and taxes and face additional regulations much more than you’d expect from a U.S. equity market. Your investment also is not protected by domestic securities laws, and you could face difficulty achieving restitution through a foreign court.

US and foreign banknotes rolled up next to each other

Source: Getty Images

What are the risks of investing in international markets?

While the rewards of investing in international stocks can be high, there are some risks to consider. Political instability in the country can devalue an investment, and the values of currencies fluctuate. Particularly in emerging markets, you may have relatively poor visibility into a company's business operations.

Foreign companies are more likely to fail to meet the communications and reliability expectations of most U.S. investors. Even foreign companies approved by the U.S. Securities and Exchange Commission (SEC) to list ADRs on U.S. exchanges will sometimes fail to meet reporting expectations, so it’s essential to understand how well and by what means an international company communicates with its investors.

Before investing in international stocks, consider how much risk you’re comfortable with taking. While emerging markets grow faster, they also tend to be more volatile, so you may prefer to focus on developed economies. By establishing a clear strategy for your non-domestic portfolio, you are better positioned to endure market turbulence and pursue long-term gains.

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