In yesterday’s article, I discussed the benefits of international investing using ADRs, American Depository Receipts. Today, I want to focus on a more diversified approach—using international ETFs and mutual funds.
International ETFs vs. Global ETFs
One issue that can be very confusing for investors buying non-U.S. investments is that the terms “global” and “international”—although often be used interchangeably—do not mean the same thing.
Global ETFs include securities in every country, including your own. International ETFs exclude your home country.
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Some investors prefer mutual funds, others like exchange-traded funds (ETFs), and some invest in both. But they do differ in several ways, so it is worth your while to determine which of those strategies (or maybe both) suits your investment preferences.
Both ETFs and Mutual Funds offer investors an organized method for diversifying their portfolios. Using one of these vehicles, you can buy stocks in an entire sector, a broad index, an investment style (such as large caps or dividend payers), a group of countries, or an individual country.
Exchange-traded funds were created to track an index, a commodity, bonds, or a basket of assets, such as an index fund. They trade like a stock on a stock exchange. And they can be bought and sold all day long.
ETFs have certain advantages:
Fees are, on average, lower than mutual funds. The expenses of ETFs are usually a couple dozen basis points (0.2% to 0.4%) less than comparable mutual fund. It is essential that you investigate the fees prior to investing, as they can really eat into your profits overtime.
ETFs trade like stocks—all day long on stock exchanges. Mutual funds can be bought or sold just once a day. You pay a commission to trade an ETF, just as you do with stocks. You can also buy them on margin and sell them short.
Dividends are reinvested immediately with an ETF, whereas in a mutual fund, the timing can vary.
ETFs can be more tax efficient than funds. You pay tax on capital gains, but in-kind transfers (buying and selling to keep up with the tracked index) do not generate a tax. On the other hand, mutual funds must distribute capital gains to shareholders which will then be taxed as a capital gain on your tax returns.
However, investors who are looking for more active management may still wish to choose mutual funds which offer a larger variety of investment strategies, focused on individual stocks instead of indexes.
As well, you don’t pay commissions with mutual funds.
3 ETFs to Capture Your Interest
Recently, Roger Conrad, Editor of Capitalist Times, and one of our contributors at Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks, offered this international ETF recommendation in the fixed income arena:
“We’re by no means universally bullish on our closed-end bond fund coverage universe. In fact, we currently hold only one in the Lifelong Income Portfolio: Aberdeen Asia-Pacific Income (FAX). Aberdeen holds a mix of government (53.59 percent) and corporate bonds from 19 countries, mostly Asian. Australia is the largest concentration, with Australian dollar bonds comprising 27.9% of the portfolio at last count and country exposure 28.1%.
“The fund protects its US dollar-paid dividend with 45 percent exposure to bonds denominated in the greenback. Other countries whose currencies are heavily represented are India and Indonesia at 9.7% and 8%, respectively.
“The fund has maintained its monthly dividend of 3.5 US cents since February 2002, when economic pressures forced a cut from 4.5 cents. That’s a long record of stability. The portion of Aberdeen’s distribution classified as return of capital so far this fiscal year is 52%.
“So why stay with Aberdeen? Two reasons: High current yield and the potential for appreciation in what’s been a very well managed portfolio of Asia-Pacific debt. The Australian dollar—up to about 79 US cents from 72 cents to start the year—is a major potential catalyst, as a further gain will flow right to shareholder returns.”
Additionally, my search for global ETFs returned these two, both rated A+ by The Street:
iShares Trust - iShares Global Tech ETF (IXN): Tracks the investment results of the S&P Global 1200 Information Technology Sector IndexTM. Top five holdings include: Apple Inc (AAPL), Microsoft Corp (MSFT), Facebook (FB), Alphabet Inc A (GOOGL), and Alphabet Inc C (GOOG).
WisdomTree Trust - WisdomTree Global SmallCap Dividend Fund (GSD): The fund tries to replicate, net of expenses, the FTSE Developed Markets ex US index. Top five holdings include: iShares MSCI South Korea Index, Nestle SA (NESN), HSBC Holdings PLC (HBCYF), Vodafone Group PLC (VODPF), and Novartis AG (NVSDF).
3 Mutual Funds to Consider
Contributor Dan Sullivan, editor of The Chartist Mutual Fund/ETF Letter recently commented on international investing, noting “It’s no secret that growth is accelerating in Europe and several emerging markets well ahead of the U.S. We recommended the following two mutual funds: Vanguard International Growth (VWIGX) and Oakmark Global (OAKGX).
Vanguard International Growth Inv (VWIGX): This 3-star-rated fund seeks long-term capital appreciation and its expense ratio is 0.46%. Top five holdings include: Tencent Holdings Ltd (TCTZF), Alibaba Group Holding Ltd ADR (BABA), ASML Holding NV (ASMLF), AIA Group Ltd (AAIGF.HK), and Amazon.com Inc (AMZN).
Oakmark Global Investor (OAKGX): seeking long-term capital appreciation, this fund is rated 3 stars by Morningstar, and has an expense ratio of 1.17%. Top five holdings include: Credit Suisse Group AG (CSGKF), Lloyds Banking Group PLC (LLDTF.L), Daimler AG (DDAIF.DE), Toyota Motor Corp (TOYOF), and Allianz SE (ALIZF.DE).
Additionally, I searched for highly-rated mutual funds and chose GuideMark Emerging Markets Service (GMLVX), a 5-star-rated emerging markets fund that also seeks long-term capital appreciation. The fund has an expense ratio of 1.63%. Top five holdings include: iShares MSCI India ETF, Samsung Electronics Co Ltd (SSNLF.KS), Tencent Holdings Ltd (TCTZF), Taiwan Semiconductor Manufacturing Co Ltd (2330.TW), and Alibaba Group Holding Ltd ADR (BABA).
The choice of international ETFs or mutual funds is up to you. Bottom line, they offer an entrée into foreign markets and are a valuable way to diversify your portfolio.
And with 2,000 or so ETFs and 9,500 mutual funds to choose from, investors have lots of opportunities.
For more advice on the best ETFs or mutual funds from the best minds on Wall Street, consider a subscription to Wall Street’s Best Investments.
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