International equity funds are funds that only invest in stocks from companies based outside of the United States.
International Equity Funds: Definition and Example
International equity funds, like other mutual funds, buy various stocks based on a specific investment strategy and then sell that mix of shares to investors. An international fund differs from a domestic one because all of its holdings are in companies based outside the United States. International mutual funds and international stock funds are other names for the same thing. According to a Vanguard report, non-US companies account for roughly half of global market capitalization. International funds allow investors to diversify their portfolios while also taking advantage of market growth worldwide. They carry a higher risk than most domestic investments due to factors such as exchange rates, political unrest, and varying levels of liquidity.What Are International Equity Funds and How Do They Work?
Investing in international equities may help you earn more money. Many advisors recommend investing between 30 percent and 50 percent of a portfolio internationally because international stock markets have historically outperformed U.S. stock markets. Because U.S. and international markets do not always move in lockstep, owning international stocks can help lower overall portfolio risk. Tip: When one part of the world's markets perform poorly, another may perform well. Having both in a portfolio helps to keep it balanced. International Equity Funds Global Equity Funds Consists entirely of stocks from countries other than the United States. Stocks from all over the world, including the United States, are included. Increase the variety of your offerings. It's possible that there will be less variety. International equity funds should not be confused with global equity funds, which invest in stocks of companies from all over the world, including U.S. and non-U.S. firms. If you invest in a global fund to gain international exposure, you may discover that the fund's holdings are primarily made up of American companies. It's possible that you already own those companies through another equity fund. International equity funds should be considered if you want true diversification.International Equity Funds: What Are Their Types and How Do They Work?
International funds can be divided into two categories: those that invest in developed countries and those that invest in emerging markets. Emerging markets are countries or regions with less developed economies but significant growth potential. However, because most of these countries, or their markets, are not well-regulated, investing in them can be risky. Greater risk, on the other hand, often means a greater potential reward. Emerging markets have long-term growth potential of over 10%, compared to 6% for the S& P 500. The most common international equity funds in a 401(k) plan are large-cap equity funds that invest in developed countries such as Japan, Germany, and the United Kingdom. If a plan does include emerging market equities, it will almost certainly be in a separate fund. Important: Financial advisors frequently advise investors who choose to invest in emerging market equities to keep their exposure to no more than 12% of their overall portfolio—and that's only for aggressive investors. Your investment in emerging markets should be limited the less aggressive you are.Is it Worth It to Invest in International Equity Funds?
While international equities can assist you in diversifying your portfolio while providing a high return potential, there are a few things to keep in mind before investing. There are many types of risks associated with investing internationally, for example: Currency risk: The dollar's value will differ from the underlying currencies of the fund. When the dollar is weaker, regardless of how your investments perform, this can help you increase your returns; however, when the dollar is strong, it can have the opposite effect. Political risk: Markets care about government stability and oversight. When you invest in a foreign country (or even your own), you run the risk of the economy or government experiencing unexpected problems. Liquidity risk: The stock market in the United States is relatively liquid, meaning that many stocks are bought and sold daily. A willing buyer is usually available when the average investor wants to sell a stock. What if there were no takers and you had no choice but to wait for one? That's a sluggish market. Many foreign exchange markets have lower trading volumes than those in the United States. With international funds, there are additional dangers to consider. Are the accounting and reporting standards comparable to those in the U.S.? Is the price for investing in those stocks higher than those for investing in stocks based in the United States? To some extent, a well-managed fund will anticipate and understand those risks.Important Points to Remember
- International equity funds purchase only non-U.S. companies.
- They provide excellent opportunities for portfolio diversification, but you should be aware of the risks.
- International funds differ from global funds, which invest in domestic and international companies.
- Emerging international markets are riskier than developed markets, but they also have higher profit potential.
