Diversifying your investment portfolio helps to reduce risk and protect your portfolio against losses during market downturns. And what better way to ensure diversification than by investing in international assets? This article discusses the 10 best international ETFs to buy. The recommendations I offer in this article comprise bonds and stocks and emerging and developed markets.
Key Takeaways
- Investing through international ETFs ensures portfolio diversification, and subsequently, lower risks because they do not precisely correlate to the U.S. market.
- The best international stock ETFs are VEA, VXUS, IXUS, VWO, and CQQQ.
- VXUS and VEA are international stocks of developed markets, while VWO focuses on emerging markets.
- The best international bond ETFs are BNDX, IAGG, IGOV, VWOB, and FEMB.
- VWOB, FEMB, and IAGG focus on emerging markets, while BNDX is U.S.-incorporated.
- Factors like historical performance, dividend yield, assets, ESG scores, and the expenses related to the fund can help identify an excellent international ETF.
What are International ETFs?
Whether you are a veteran or a newbie investor, chances are you have read about international exchange-traded funds (ETFs). You may even have a shortlist of some of these stocks and bonds you find interesting during your research.
International exchange-traded funds (ETFs) primarily invest in foreign-based securities. They may also hold equities or fixed-income securities, focusing on a specific country, region, or worldwide. I classify ETFs as developed markets and emerging markets based on the regions or countries.
If an ETF invests in the stocks or bonds of less developed countries, like Russia, Mexico, South Africa, Egypt, China, and India, they are known as emerging markets ETFs. Conversely, if the investment is in the stocks and bonds of countries like France, Canada, Japan, Australia, or the United Kingdom, they are developed markets ETFs.
The U.S. stocks do not offer a fair representation of the global stock market. Limiting yourself to these stock options excludes you from several exciting investment opportunities. You would be missing out on the largest electronic, telecommunication, and automotive companies, all of which make up the international emerging markets.
Diversification is the beauty of investment. Considering no one can say which country’s stocks or bonds will perform best at any particular time, having as many international options as possible puts you in a very good position. The potential upsides outweigh the possible downsides.
You may want to argue that most U.S. stocks have outperformed their international competitors over the past few decades. But in reality, these performances are attributed to increasing price multiples rather than better business fundamentals. In simple terms, these stocks become more expensive – they did not necessarily arrive at higher profits.
The last decade has seen a vast increase in the acceptance of ETFs worldwide. There were 7602 ETFs globally in 2020, compared to the 276 in 2003. Deciding on the exact non-US companies to invest in can be tricky. You have many options to choose from, both in the emerging and developed market.
But not to worry, I have researched and compiled the best international ETFs you should consider. Read on to find out what international bonds and stocks have made my list.
Why Invest in International Stocks and Bonds?
According to a 2020 survey by BBH and Co, up to 72% of global ETF investors wanted a higher allocation in the next year. Furthermore, 65% of respondent investors planned more exposure to active ETFs, up from the 57% recorded in 2020. Therefore, it is safe to say more investors are getting into the international ETF space.
Investing in local companies can feel less risky and more comfortable. However, it limits your portfolio’s potentials. A proven way to maximize the potentials of your portfolio is to invest in high-performing international stocks and bonds.
Unlike other investment funds in the market, we always trade ETFs on a stock exchange like a regular stock. As a result, purchase and sale transactions are the two major factors determining ETFs’ prices. Additionally, an international ETF that has spread its investments across several countries offers better protection from the effects of a potential major slump or other financial problems.
Furthermore, with the increasing decline in the U.S. dollar, investing in international assets offers you a level of protection by hedging against the dollar. A sudden drop in the U.S. dollar usually forces the U.S. stocks to underperform compared to international stocks. Conversely, an increase in the value of the U.S. dollar translates to a better performance of the U.S. stocks.
Since we cannot predict what will happen next in terms of currency appreciation and depreciation, it is best to be on the safe side by including international stocks and bonds in your investment portfolio.
With increasing globalization and newer financial regulations, you can now access more financial markets. Whether you are investing in international stocks or bonds, or both, I strongly recommend that you determine your risk tolerance and let it shape your level of participation and international exposure to ETFs.
The 10 Best International ETFs
Here are the 10 best international ETFs I recommend to any investor. The list comprises five international stock ETFs and five international bond ETFs.
Best International Stock ETFs
Let’s start with the international stocks.
1. Vanguard FTSE Developed Markets ETF (VEA)
Vanguard FTSE Developed Markets ETF (VEA) is an international equity. The expense ratio is 0.05%, and the turnover rate is 3%. Furthermore, the ESG rating is AA, indicating an excellent distribution of fund holdings. It is an ETF looking to track the FTSE Global All Cap ex-US index, with a 2.42% yield and over 163.64B worth of assets. The VEA is one of the best international stock bonds you can add to your portfolio, especially if you are an investor looking to focus on developed markets outside the U.S., the VEA is worthy of your consideration.
2. Vanguard Total International Stock ETF (VXUS)
Like most Vanguard International ETFs, the Vanguard Total International Stock offers an easy way to add non-US assets to your portfolio. It is a popular broad international stock ETF with an expense ratio of 0.08% – one of the lowest you can find around.
The total asset held by VXUS stands at 416.84B, with a yield of 2.49% and a 7% turnover. In addition, most of the VXUS fund’s holdings (38%) receive an excellent ESG rating, indicating a higher resilience to disruptions arising from environmental, social, and governance (ESG) issues.
The iShares Core MSCI Total International Stock ETF (IXUS) is another international equity stock on our list. Tracking the MSI ACWI ex USA IMI Index, this fund has over 4200 equity holdings, translating to about 31 billion in assets. The expense ratio of this international stock ETF is 0.09%, which is considerably lower than most other options.
Like VXUS, 39% of the fund’s holdings have high ESG ratings, which means the fund has exposure to companies with excellent management of financially relevant ESG issues. Again, this is a must-have for your portfolio, especially if you do not have VXUS.
4. Vanguard FTSE Emerging Markets ETF (VWO)
The Vanguard FTSE Emerging Markets ETF (VWO) is considerably different from other developed market international stocks we discussed recently – VXUS and VEA. It is an emerging market stock, which means it is a better diversifier than the two. The performance of VWO over the years indicates a clear superior performance over U.S. stocks.
With over 110 billion assets, an expense ratio of 0.10%, and over 4300 total equity holdings, this emerging market international equity stock will offer more exposure and diversification to your portfolio than other options on this list.
5. Invesco China Technology ETF (CQQQ).
As the name suggests, the Invesco China Technology ETF (CQQQ) is an international stock ETF of the China region. It aims to track the investment results of the FTSE China Incl A 25% Technology Capped Index. In addition, it focuses on the FTSE China Index and FTSE China A stock Connect index, classified as information technology securities.
The expense ratio is very low at 0.70%, and the funds currently hold over 1.52 billion, with over 100 equity holdings. So if you are looking to add a non-diversified international bond ETF to your portfolio, CQQQ should be one of your top considerations.
Best International Bond ETFs
1. Vanguard Total International Bond ETF (BNDX)
Adding the Vanguard Total International Bond ETF (BNDX) to your portfolio gives you a USD-hedged diversification that spans the entire foreign bond market. As an exchange-traded fund incorporated in the U.S., the fund aims for investment results that reflect the price, performance, and yield of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index.
BNDX has an expense ratio of 0.08%, with over 6000 bond holdings and over 100 billion assets. Most of the fund’s investments are in sovereign bonds and rated AA or higher. Asides from diversification, this international bond ETF comes at a low cost and cushions your portfolio against the impacts of non-U.S. currency fluctuations on performance. So, I recommend it to anyone looking to buy a broad international bond fund.
Suppose you are interested in a wide exposure to investment-grade bonds from both emerging and developed market issuers outside the U.S.. In that case, you should consider the iShares Core International Aggregate Bond ETF (IAGG). The fund is interested in tracking the investment results of the Bloomberg Global Aggregate ex USD 10% Issuer Capped (Hedged) Index.
The IAGG net expense ratio is 0.70%, and it holds about 1.5 billion in total net assets. Since it deals in non-USD-denominated securities, your portfolio is exposed to minimal fluctuations between the USD and the component currencies’ value. If you cannot get BNDX, I strongly recommend going for IAGG as a suitable replacement.
iShares International Treasury Bond ETF is an international bond ETF providing exposure to only foreign treasury bonds and ex-U.S. sovereign bonds. The fund seeks to track a market-value-weighted index of the developed market and government-issued debts outside the U.S. with one-year maturities. This is why it focuses only on local-currency-denominated sovereign bonds.
The MSCI Fund Rating of IGOV is A (scoring 6.29 out of 10), indicating that the funds comprise companies that show strong resilience to disruptions caused by environmental, social, and governance issues. In addition, its expense ratio is just 0.35%, and it holds 736 assets. Although IGOV does not include government bonds from emergent markets, it is still a worthy consideration for your portfolio.
4. Vanguard Emerging Markets Government Bond ETF (VWOB)
The Vanguard Emerging Markets Government Bond ETF (VWOB) is an international bond ETF tracking only USD-denominated emerging market debt. Therefore, it protects you against any impact of currency volatilities. In addition, the MSCI ESG fund rating of VWOB is BB, which means an average resilience against long-term risks and opportunities from ESG factors.
It holds total net assets of about 3 billion, with a net expense ratio of 0.25%. If you are holding only U.S. bonds, adding VWOB to your portfolio can be of great advantage, considering these emerging market bonds correlate minimally to U.S. bonds.
5. First Trust Emerging Markets Local Currency Bond ETF (FEMB)
The First Trust Emerging Markets Local Currency Bond (FEMB) targets multiple bonds issued by entities in the emerging market, including quasi-sovereign, sub-sovereign, and sovereign bodies. It is denominated in local currencies and offers broad exposure to the emerging-market sovereign bond fund space. Since it holds debt denominated in local currencies, the volatilities in F.X. determine the fund’s net return. Therefore, it is essential to note that you are not entirely protected from the interest-rate volatilities in the U.S. if this is part of your portfolio.
FEMB has about $260 million total assets under its management, with an expense ratio of 0.85%. In addition, 8% of the fund’s holdings have an MSCI ESG rating of A, AA, or AAA, making them reasonably resilient against intrusions associated with environmental, social, and governmental issues. It targets maximum total return and current, making it a worthy addition to your portfolio.
Final Verdict
International Exchange-traded funds (ETFs) offer you an excellent way to gain exposure to any stock or asset class outside the United States. The approach is more straightforward, and it requires less research than when you are investing in individual stocks. But it is important to note that these exchange-traded funds are different in certain aspects.
Choosing the right international stock and bonds for your portfolio should follow a streamlined process. First, take a good look at the historical performance, dividend yield, the assets the fund invests in, and the expenses related to the fund. ESG scores can also help you determine which options are resilient to social and environmental impacts.
Finally, a dive into the international ETFs investment waters ensures considerable portfolio diversification and better risk management – two essential recipes for any profitable investment.