What do notable companies like Toyota Motor Corp. (ticker: TM), Nintendo Co. Ltd. (NTDOY), ASML Holding NV (ASML) and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) have in common? An ex-U.S. focus. That is, these large, renowned companies are based outside the United States, and are known as international stocks.
“Generally, international stocks are shares in companies listed or headquartered outside the U.S.,” says Christopher Huemmer, senior investment strategist for FlexShares exchange-traded funds at Northern Trust Asset Management. “Like U.S. stocks, international stocks trade on exchanges, are subject to their country’s regulatory system, and file public financial documents in accordance with their laws.”
While U.S. stocks have outperformed strongly over the last decade, many experts say that allocating a portion of your portfolio to foreign stocks can provide numerous diversification benefits.
“The ex-U.S. market makes up about 40% to 45% of the world’s market capitalization, so by ignoring international stocks, investors are missing out on roughly half the world’s investing opportunities,” says Kirk Kinder, founder and president of Picket Fence Financial. “Moreover, international stocks are substantially undervalued when you look at metrics like price-to-earnings and price-to-book ratios.”
Another reason to invest in international stocks? Hedging against the risk of stagnant U.S. market returns, like during the period from 1999 to 2009, when U.S. stocks experienced abysmal returns due to the dot-com bubble and the Great Recession.
“Adding international stocks to your portfolio can dampen volatility and improve returns, since the U.S. economy and market may face challenges at different times compared to international regions,” says Scott Klimo, chief investment officer at Saturna Capital. “Mitigating currency risk also plays a role as the U.S. dollar may strengthen or weaken versus other countries at different times.”
Finally, there’s the risk of a possible mean reversion to consider. Given the stellar returns of U.S. stocks over the last decade, some experts are betting that international stocks may be due for some time in the limelight.
“Vanguard’s recently released 2023 Economic and Market Outlook expects international equities to outperform U.S. stocks over the next decade, largely driven by lower valuations, higher dividend yields and a favorable currency outlook,” says Christine Franquin, principal and senior portfolio manager at Vanguard.
With that in mind, here are seven of the best international stock mutual funds and exchange-traded funds, or ETFs, to buy in 2023:
|Fund||Top holdings||Top exposure||Expense ratio|
|Vanguard Total International Stock ETF (VXUS)||Taiwan Semiconductor, Nestle||Europe, Pacific region, emerging markets||0.07%|
|Fidelity International Index Fund (FSPSX)||Nestle, Novo Nordisk AS (NOVO-B.CO)||Europe, Japan||0.035%|
|iShares Core MSCI Emerging Markets ETF (IEMG)||Taiwan Semiconductor, Samsung Electronics, Tencent Holdings, Alibaba Group||China, Taiwan, India, South Korea||0.09%|
|Dodge & Cox International Stock Fund (DODFX)||Sanofi (SAN.PA), UBS Group AG (UBSG.SW), Novartis AG (NOVN.SW)||Europe, emerging markets||0.62%|
|Schwab International Dividend Equity ETF (SCHY)||Nintendo, Roche Holding AG (ROG.SW), Enel SpA (ENEL.MI)||United Kingdom, Australia, Japan, Switzerland||0.14%|
|iShares MSCI BIC ETF (BKF)||Tencent Holdings, Alibaba Group||China, India, Brazil||0.69%|
|FlexShares Emerging Markets Quality Low Volatility ETF (QLVE)||Taiwan Semiconductor, Tencent Holdings, Samsung Electronics||China, Taiwan, India||0.4%|
Vanguard Total International Stock ETF (VXUS)
“Vanguard’s investment research supports having between 20% to 40% of stock allocated to international stock for diversification benefits,” says Sophoan Prak, a certified financial planner and financial advisor at Vanguard. “Buying a broad index ETF such as VXUS can be a great way of gaining diversified market-weight exposure to a large portfolio of international stocks.”
By passively tracking the FTSE Global All Cap ex US Index, VXUS offers exposure to nearly 8,000 international stocks such as Taiwan Semiconductor, Nestle SA (NSRGY), ASML, Samsung Electronics Co. Ltd. (005930.KS) and Shell PLC (SHEL). Like many of Vanguard’s ETFs, VXUS charges a low expense ratio of 0.07%, or $7 annually on a $10,000 investment.
Fidelity International Index Fund (FSPSX)
Investors who prefer the simplicity of a mutual fund can opt for FSPSX, which passively tracks the MSCI Europe, Australasia and Far East Index. Unlike VXUS, the price, or net asset value, of FSPSX is determined once a day at market close. This makes automating consistent reinvestments much easier as investors no longer need to actively trade shares throughout the day.
FSPSX has a developed-markets focus. “Developed-market funds will provide exposure to companies from countries with more mature economies, regulatory systems and capital markets, such as much of Western Europe, Japan, Australia and Canada,” Huemmer says. In FSPSX, countries like Japan, the U.K., France, Switzerland and Germany have large weightings. The fund charges a 0.035% expense ratio.
iShares Core MSCI Emerging Markets ETF (IEMG)
The counterpart to developed-market stocks are emerging-market stocks. “Emerging-market funds will focus on companies located in rapidly growing countries across the world like India, Brazil, China and others,” Huemmer says. Kinder agrees, noting that emerging markets often include “the youngest and often most populous populations, so companies there stand to profit from consumer trends.”
For a low-cost approach to indexing emerging markets, consider IEMG, which tracks the MSCI Emerging Markets Investable Market Index and costs a 0.09% expense ratio. IEMG’s largest exposure comes from Chinese stocks like Tencent Holdings Ltd. (TCEHY), Alibaba Group Holding Ltd. (BABA) and China Construction Bank Corp. (CICHY), with around 26% of the ETF comprising Chinese equities.
Dodge & Cox International Stock Fund (DODFX)
Investors willing to make a bet on active management beating passive indexing can opt for DODFX, which employs fundamental analysis to pick potentially undervalued international stocks with long-term growth potential. Historically, DODFX’s strategy has strongly outperformed its benchmark, the MSCI EAFE Index, with total returns averaging 9.2% annually over the last 20 years versus 7.3% for the benchmark.
While DODFX is benchmarked against the MSCI EAFE Index, the fund’s weightings depart substantially from the benchmark due to its active management strategy. Currently, compared to the MSCI EAFE Index, DODFX is overweight emerging-market equities, underweight Japanese equities and overweight financial sector stocks. The fund charges a 0.62% expense ratio.
Schwab International Dividend Equity ETF (SCHY)
Dividend investors can find some compelling international stock ETFs that generate above-average yields, too. A great example is SCHY, which complements the popular Schwab U.S. Dividend ETF (SCHD) with exposure to international dividend stocks by tracking the Dow Jones International Dividend 100 Index. This ETF sports a 0.14% expense ratio and currently pays a 30-day SEC yield of 4.6%.
SCHY’s index also employs some extra screeners to ensure quality in its stock picks. Currently, the Dow Jones International Dividend 100 Index only invests in international stocks that have paid dividends for at least 10 consecutive years, possess lower volatility compared to sector peers, and have healthy financial ratios. However, investors should be aware that this ETF has a higher portfolio turnover rate of 47.7%, which pushes up costs for investors.
iShares MSCI BIC ETF (BKF)
“When it comes to emerging markets, major economies such as India, China and Brazil often get grouped together,” says Krishna Mohanraj, portfolio manager at Diamond Hill Capital Management. “We believe it is important to have the flexibility to invest in all of these markets, but be very selective within them, as each of those countries has their own risks that must be considered.”
Investors wishing to express a more targeted view when it comes to emerging-market stocks can consider BKF, which only holds Chinese, Brazilian and Indian equities. The resulting portfolio of 600-plus stocks provides regional exposure to three of the most notable emerging-market economies within a single ticker. BKF charges a 0.69% expense ratio.
FlexShares Emerging Markets Quality Low Volatility ETF (QLVE)
“In the current economic environment, strategies with the potential to help protect in down markets while still participating when markets move higher may be of interest to many investors,” Huemmer says. “At FlexShares, we often focus on how combining financial health, or quality, with a low-volatility approach makes a lot of sense in today’s market conditions.”
Investors interested in emerging-market stocks, but wary of their historically higher volatility may like QLVE, which employs a rules-based approach to screening for quality, low-volatility international stocks. The ETF tracks the Northern Trust Emerging Markets Quality Low Volatility Index, which checks for factors like robust profitability, high cash flow and a lower-than-average beta. QLVE charges a 0.4% expense ratio.
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