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An international ETF, which stands for Exchange-Traded Fund, is a type of investment fund based on stocks in companies from a specific country or region. The performance of the fund generally is designed to correspond to some extent with the performance of the country's economy. Investing in an international ETF can be a relatively simple way of investing in a country.
There are some notable differences between an international ETF and more common ways of investing that relate to specific stock markets. One is that the stocks that make up the fund are all from a specific country or region. This may not be the case with a product based on an entire stock market that may include stocks from overseas companies.
There are also some key tax advantages to investing in an international ETF. For example, there tend to be fewer trades, which means a fewer number of occasions when the investor might have a tax liability. This is magnified by the fact that usually there are fewer unpredictable situations that force trades. In turn this can make it easier to predict when tax liabilities will arise, making efficient tax planning easier.
Another of the main selling points of an international ETF is that its growth or decline will likely share few common factors with investments in the US market. This helps avoid the problem that an investor that puts his money into a variety of domestic-based indexes will not get as much diversity; for example, if one domestic index falls during a stock market slump, there is a good chance that other domestic indices will also follow suit. Investing in international stocks as well as domestic stocks can be seen as increasing the chances of picking a winner. Of course, it's also possible that domestic markets may perform well but the investor will see these gains limited or wiped out by overseas losses.
The specific advantages and disadvantages of an international ETF will depend on its particular circumstances and make up. As a general rule, though, many markets covered by international ETFs are more volatile than US markets. This means prices tend to move up and down more rapidly and to greater degrees. While this means the potential gains — and losses — may be greater, many investors see this as a drawback as it makes the investments less predictable and secure. Another disadvantage is that the expense ratio, which is the portion of investments that goes toward fees, tends to be considerably higher with an international ETF than a domestic equivalent.
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