As economic growth continues to trickle here in the United States, more investors are looking abroad to both foreign markets and foreign companies for earnings gains. With thousands of international ETFs to choose from, investors can find exposure to commodities, industries and domestic economies in just about any country. Endless variations means there’s an international ETF to suit any investor, but experts say you should look carefully at what you’re buying.
International ETFs are pretty broad and can be broken down into global, regional and country funds. They can be divided further by index, asset class or sector. Following the trend of ETF growth in general, more investors are looking to ETFs for their international exposure, says Rick Vollaro, chief investment strategist for Pinnacle Advisory Group. With thousands of international ETFs available to individual investors, Vollaro says it’s easier than ever for individuals to invest in niches in far away countries.
Want to invest in infrastructure development in Brazil? Check out the EG Shares Brazil Infrastructure ETF (BRXX). Want exposure to the domestic consumers in Vietnam? Try Market Vectors Vietnam ETF (VNM). And if you want to get exposure to mining and banking in South America, look into the Global X FTSE Andean 40 ETF.
So many international ETFs are on the market that investors can use them to make just about any type of investment they need, says Patricia Oey, ETF analyst at Morningstar. This includes global banking, commodities, domestic economies, regional plays, domestic large-cap or domestic small-caps. Many investors have been using international ETFs in recent years as a means for tapping into developing economies, Oey says. BRIC (Brazil, Russia, India and China) countries continue to remain popular, while more investors also seek exposure in Southeast Asia and parts of Latin America.
“They’re a nice niche tool to use,” Oey says, “but I would say for the average investor they can be a little too much because they require a little active monitoring. You really have to look at what you’re buying.”
A downside to having so many options is that investors can have problems selecting the right ETF for the right exposure. A common problem with large-cap country-specific ETFs is that they often hold companies whose business is more international than related to the home country, says Adam Patti, CEO of IndexIQ.
For example, an investor may want to get exposure to Canada because of the energy and materials trade in that market. One could blindly buy a Canadian ETF, Patti says, only to discover that the fund holds mainly big global banks. At that point, the fund is essentially a global banking fund, not one that offers exposure to Canada’s domestic economy.
“You want to get the proper sector exposure that you are looking for and get access to consumers of those countries,” Patti says. “Our research has found that small-caps are consistently the best way to get exposure to these countries.”
More often than not, consumers buy funds based on country names and don’t do the proper homework to discover what those funds hold, Patti says. Although it may still be a winning proposition for the investor, it doesn’t always offer the exposure they’re looking for. Depending on the other positions in their portfolio, that could leave the investor overweighted in large-cap multinationals or in a particular industry.
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