Want to invest outside of the U.S.? There are promising stock markets around the world.
When we think about stock markets, Around the World in 80 Days, the Jules Verne novel published in 1873, probably isn’t the first thing that comes to mind. The story revolves around the adventures and mishaps of Londoner Phileas Fogg as he attempts to circumnavigate the globe in 80 days to win a wager. I won’t go into the details of the book except to say that many of the technological innovations of the late 1800s made it possible for people to imagine themselves traveling the globe.
Thanks to events like the opening of the Suez Canal, the completion of transcontinental railways, and major advances in the design and mechanics of ocean-going steamships, the late 1800s helped us think about the world outside of our immediate purview.
For many investors, though, especially investors in the U.S., it’s all too easy to forget that there are stock markets around the world. Much like the characters in Verne’s novel, it takes a little prompting for us to look around and see what we might be missing.
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Why and how to investing in stock markets around the world
Most investment advisors suggest that your portfolio includes a selection of international stocks. That can be tough, since we’re pretty familiar with names like Coca-Cola (KO), but chances are you don’t know Varun Beverages Ltd., even though they’re well-known on the National Stock Exchange of India.
You’ll find similar stories when you look at the Shanghai Stock Exchange, the Hong Kong Stock Exchange, the Johannesburg Stock Exchange, the Toronto Stock Exchange, and so on all over the globe. You can find value stocks and growth stocks in countries around the globe. There are high-quality pharmaceutical companies and consumer stocks with steady and secure revenue.
So what can different stock markets around the world offer that domestic markets can’t? While having traditional, U.S. blue-chip stocks in your portfolio may help protect your wealth, you need to think a bit more boldly to actually build wealth. In a world in which faster growth is happening in many places outside U.S. borders, it’s never been more important to have a global portfolio.
As an example, in 2019, the benchmark stock markets of eight countries outperformed the S&P, led by Greece at 48%, Russia at 43% and Romania at just under 34%. The other five were two or three percentage points better than the S&P’s 28% return.
That said, there are some difficulties with investing in other stock markets. In addition to the lack of familiarity with the companies, different reporting standards can impede transparency. Translating money from one currency to another can skew financial statements and returns. But the good news is that there are several ways to reduce these risks and still enjoy the benefits of international investing.
Now, with exchange-traded funds, Standard & Poor’s Depositary Receipts, index funds and American Depositary Receipts offering instant exposure to every imaginable country, region, sector, industry and index, investors have every reason to be much more cosmopolitan.
With around 2,000 ETFs currently in existence, investors can choose one for almost any strategy—including sector, broad market and country, or region-focused. Like ETFs, mutual funds have built-in diversification and offer investing in foreign companies, companies outside the U.S. (international), regional and country funds, and international index funds (track international markets). And ADRs are foreign stocks that trade on U.S. stock exchanges. These companies must comply with U.S. listing and reporting standards.
One example for a conservative global approach is the S&P Global Timber & Forestry Index Fund (WOOD). This ETF tracks the performance of forestry and timber firms worldwide. Forty-five percent of WOOD is invested in companies based in the United States and its two top two holdings, Weyerhaeuser (WY) and Rayonier (RYN), together account for about 20% of its portfolio. But an even bigger portion is invested in global stocks. Canada accounts for 12% of the ETF, while there are large allocations to Brazil, Finland, and Japan.
There are plenty of reasons and ways to invest in some of the different stock markets around the world. And thanks to products like ADRs and ETFs, it’s easier than ever.
How much of your portfolio is dedicated to investments in global stock markets?