August 25, 2020
Most investors could benefit from the additional diversification gained through holding some foreign and international investments in their portfolios. Younger markets like China and India have higher expected growth rates than North America, likely due to tech booms, increasing demand, rising incomes, and younger populations. These factors lead to a higher long-term GDP growth estimate and consequently higher growth potential for investors.
Still, direct international investing remains riskier than investing in North America. Emerging markets may not have the infrastructure and stability present in the US stock market, whether it be investor protection laws, robust banking systems, or regulatory oversight. We go over some of the risks in our guide below.
Keeping the risks in mind, if you are interested in learning how to buy international stocks, there are a few ways to start investing internationally. Keep reading below for tips!
The main reasons why people invest in international investments and investments with international exposure are:
Unfortunately, all the additional rewards come with additional risks:
Instability: Instability can come from countries undergoing transition, revolution, war, or economic uncertainty. This impacts the businesses and industries within those areas and the prospects of the country as a whole. These days COVID-19 has led to a rise in global uncertainty and a weakening US dollar, which might make international investing less attractive.
Lack of financial information and real-time data: Not every stock exchange requires the same level of accounting information and financial filings as the US market. Even if financial statements exist, there may be lack of transparency or a set of industry standards for presentation of financial information. Finally, the investment platforms available may not be able to acquire real-time data on stock prices.
Limited trading: Stock exchanges in a few countries might not be developed because of a lack of demand and supply that could make the market more efficient and active. It may be more costly for investors to do trades or for companies to list on the exchange. This may act as a barrier to entry.
No equivalent of overseers like the SEC: The SEC (Securities Exchange Commission) oversees many aspects of the US stock market and is mandated to protect investors from criminal activity and fraud. Although many emerging markets have oversight boards or organizations, they may not be as developed or influential as the SEC.
American Depositary Receipts (ADRs)
An American Depositary Receipt, or ADR, is a certificate that represents a foreign stock that trades in the United States. Investment brokerages and banks in the US can issue ADRs, and investors can buy or sell these ADRs on the stock market just like regular stocks.
Just like any contract, if you buy an ADR you have the right to obtain the foreign stock captured in the ADR. However, most investors usually find that an ADR provides enough foreign diversification and they don’t actually need to obtain the foreign stock itself. Owning an ADR also eliminates the need for buying or selling foreign currencies or for maneuvering the policies and procedures of a foreign stock exchange.
An ADR can represent anything from a fraction of a foreign share or multiple shares of the foreign stock. That way, the ADR will start trading at a moderate price, or be in a range of similar stocks on the exchange where it trades. The price of an ADR usually stays close to the price of the foreign stock in its home market, plus any fees and listing costs.
ADRs are a great opportunity for US investors to invest in foreign assets safely and easily. In order to be listed in an ADR, a foreign company must provide detailed financial information to the sponsoring bank or brokerage. There is an additional layer of security in the form of US regulators, who do due diligence on the company before allowing it to be listed. There are other benefits as well that contribute to an investor’s peace of mind: stock prices are updated regularly, trades settle and clear in US dollars, and any dividends are converted into US dollars before being sent to the investor.
International exchange-traded funds (ETFs)
If holding stocks of individual foreign companies sounds too risky to you (basically adding country-, industry-, and company-specific risk to your portfolio), you also have the option of international exchange traded funds (ETFs). These ETFs offer investors more options than ever before: using an international ETF you can invest in a country, a region, an industry within a specified region, strategy-based international investments, and more. Most investment brokerages have their own list of international ETFs to choose from.
US-traded foreign stocks
Although most foreign stocks trade in the US markets as ADRs, some foreign companies list their stock directly here as well as in their local market. Some notable examples include Alibaba and AstraZeneca. Investors can purchase US-listed foreign stocks that trade in the United States the same way they’d purchase domestic stocks—through a broker or investment platform.
Although the global landscape is more uncertain than ever, it is worthwhile to consider investing outside the US. For the reasons we mentioned in the beginning of the article—higher GDP growth rates, tech booms, younger populations—emerging markets can be a great opportunity for investors to benefit from increased globalization.
While no one can predict what will happen with international markets, long-term investors may be well-advised to hold international equities in a diversified portfolio.