The Simplest Way to Invest Beyond Your Home Market
When starting to invest, people naturally pay attention to familiar domestic companies or their home market first. This is because information is easy to find and the company names are familiar.
However, if you concentrate your assets in one country, your investment results can be heavily influenced by that country's economic and stock market conditions. International ETFs are products you can utilize to reduce this country-concentration risk and broaden your investment scope.
By using international ETFs, you can diversify your investments across multiple countries and companies without having to pick individual foreign stocks one by one. However, just because the investment region broadens does not mean the risks disappear. You must also consider factors different from domestic ETFs, such as exchange rates, political and economic environments, and operating costs.
What is an International ETF?
An international ETF refers to an Exchange-Traded Fundthat invests in foreign assets such as stocks and bonds outside of the country where the investor resides.
From the perspective of a domestic investor, it can largely be divided into two methods.
The first is an ETF listed on the domestic stock market that tracks foreign indices such as those of the US, Europe, or Japan. Its characteristic is that it can be traded in the local currency just like domestic stocks.
The second is an ETF directly listed on foreign exchanges like those in the US. It must be traded according to the trading hours and currency of that specific exchange.
Both methods allow investment in foreign markets, but the trading currency, trading hours, costs, and exchange rate application methods can differ. Therefore, you should not judge them as the identical product simply based on the commonality of 'investing overseas.'
Major Types of International ETFs
International ETFs are divided into several types depending on the investing country, region, and asset.
| Classification | Key Characteristics |
|---|---|
| All-World Market ETFs | Broadly includes various developed and emerging markets |
| Global ETFs | Allows investment in multiple countries worldwide, including the home market |
| Developed Market ETFs | Invests in relatively mature markets like the US, Europe, and Japan |
| Emerging Market ETFs | Invests in emerging markets with both high growth potential and high volatility |
| Regional ETFs | Focuses on specific regions such as Europe, Asia, or Latin America |
| Country-Specific ETFs | Focuses on specific countries such as Japan, India, or Germany |
| International Bond ETFs | | Invests in government or corporate bonds of various countries |
The point to be careful here is that you should not judge the degree of diversification solely by the product name.
Even if it has the name 'Global' or 'World', the proportion of a specific country can be very high. Conversely, even if you hold multiple international ETFs, if the constituent stocks overlap, the actual diversification effect may be smaller than expected.
Advantages of International ETFs
- Can reduce country concentration risk
If you only invest in the domestic market, you are greatly influenced by the domestic economy, policies, and industrial structure. By utilizing international ETFs, you can divide your investment regions and lower your dependence on a specific country. - Can access diverse companies and industries
You can access various industries such as global tech companies, healthcare companies, and semiconductor companies that are difficult to choose in the domestic market. - Can reduce the burden of picking individual foreign stocks
Analyzing all the financial statements and business details of foreign companies is not easy for beginners. By using an ETF, you can invest across multiple companies with a single product. - Can invest in markets at different growth stages
The economies of countries around the world do not move at the same speed. There is also a method of dividing your investment scope into mature developed markets and emerging markets with high growth potential.
However, international diversification does not prevent losses. When global stock markets fall simultaneously or movements of various markets become similar, international ETFs can also fall together.
Risks You Must Check in International ETFs
Currency Fluctuation Risk
Even if the price of the foreign asset rises, if the exchange rate moves unfavorably, the return converted to your home currency can decrease.
Conversely, even if the asset price has fallen, the loss based on the home currency may be partially reduced depending on the exchange rate movement. You must understand that the investment result of an international ETF is influenced by both the fluctuation of the underlying asset and the currency exchange rate.
Political, Economic, and Regulatory Risk
Every country has different political situations, economic policies, financial market systems, and corporate disclosure standards. If government policies or regulations suddenly change, it can affect the price of the ETF investing in that country.
Volatility and Liquidity Risk of Emerging Markets
Emerging markets can show high growth potential, but price fluctuations can be large due to political instability, currency value changes, and low trading volume.
When market conditions are not good, it may be difficult to trade quickly at the desired price.
Expense Ratios and Trading Costs
International ETFs may have higher expense ratiosthan ETFs investing in the domestic market. If you trade ETFs directly listed on foreign exchanges, you must also check currency exchange costs and trading commissions.
Even a small difference in cost can affect the cumulative result over a long investment period, so you should examine the total expense ratio and other costs together.
Difference in Market Operating Hours
Foreign exchanges have different operating hours from the domestic market. Domestically listed foreign asset ETFs can also be traded during hours when the underlying foreign market is closed.
In this case, the gap between the ETF's market price and its actual Net Asset Value (NAV) can widen, so you must carefully check the trading price.
Difference Between Currency-Hedged and Unhedged Types
When looking at international ETFs, you can see the expressions 'currency-hedged' and 'unhedged'.
An unhedged type is structured to be affected by the currency exchange rate changes as well as the price changes of the foreign asset. Even if the target asset rises, if the investor's home currency strengthens, the converted return can be lowered.
A currency-hedged type is a product designed to reduce the impact of currency exchange rate changes on the investment result. However, it does not completely eliminate currency risk, and costs can incur during the hedging process.
Neither the currency-hedged nor the unhedged type is always advantageous. You must comprehensively consider the investment period, currency forecast, costs, and investment objectives.
Things to Check Before Choosing an International ETF
First, you must check which country and region it invests in.
Second, you must examine which index it tracks . Even ETFs with similar names can have different constituent stocks and country weightings depending on the tracked index.
Third, you must check the total expense ratio and trading costs
Fourth, you must examine the trading volume and liquidity. If the trading volume is too low, it may be difficult to buy or sell at the desired price.
Fifth, you must check whether it is currency-hedged.
Sixth, you must examine the top holdings and country weightings. If the proportion of a specific company or country is too high, the diversification effect may be smaller than you thought.
Finally, you must also check if the constituent stocks overlap with ETFs you already hold.
Common Misconceptions Made by Beginners
Not all international ETFs are sufficiently diversified. ETFs that concentrate on a specific country or industry can actually be highly volatile.
Holding multiple ETFs does not automatically complete diversification either. This is because ETFs with different names can repeatedly hold the same large-cap companies.
Also, you cannot conclude that an international ETF with recent high returns will produce the same performance in the future. Past performance does not guarantee future returns.
You should check the investment target, constituent stocks, costs, and risks first, rather than the product's recognition or recent rankings.
ConclusionConclusion
International ETFs are tools that allow you to invest in various countries and companies outside your domestic market. They have the advantage of reducing the burden of directly selecting individual foreign stocks and broadening your investment regions.
However, as the investment scope expands overseas, new risks such as exchange rates, politics and regulations, liquidity, and costs also arise.
Therefore, rather than judging that 'it is safer because it is an international ETF', you should check which countries and assets it invests in, how much the costs are, and how it is exposed to exchange rates.
The purpose of international ETFs is not unconditionally getting high returns, but broadening your investment scope to suit your investment objectives. It is important to make a careful choice after examining whether there is sufficient diversification and a level of risk you can handle.
※ This article is for educational purposes to help understand financial products and does not recommend the purchase or sale of any specific product. All investment decisions and responsibilities lie with the investor themselves.
Frequently Asked Questions (FAQ)
Q1. Does holding an international ETF automatically mean I am internationally diversified?
A1. Not necessarily. Some products have a high proportion of specific countries or a few companies, so you must check the country weightings and top holdings.
Q2. Are currency-hedged ETFs safer than unhedged ETFs?
A2. Currency-hedged types can help reduce the impact of exchange rate fluctuations, but hedging costs occur and they do not completely eliminate currency risk. Which method is appropriate depends on your investment period and objectives.
Q3. Should I just choose international ETFs with the highest recent returns?
A3. Choosing based solely on recent returns is not advisable. You must check the tracking index, investment region, constituent stocks, costs, liquidity, and risks all together.