International ETFs Are Appealing, But Diversification Is Key

Until recently, foreign stocks have outperformed U.S. markets, but when considering exchange traded funds (ETFs), global diversification remains essential.

According to the Mole for CNN Money, U.S. stock funds have earned only 82% from 2003 through 2007.  These numbers are somewhat daunting compared to the 168% earned by international stock funds during the same period.

Regardless, it is vital to be exposed to U.S. markets and foreign markets for a number of different reasons. The U.S. represents nearly 42% of the world market capitalization - meaning, 42% of the world stock market value.  Not considering the United States when investing would leave an enormous gap in a globally diversified portfolio.

A big part of the international appeal stems from emerging markets.  David Hoffman for InvestmentNews explains that recent moves to floating exchange rates, an increase in the independence of central banks, current account surpluses, decreasing interest rates and reduced levels of debt all contribute to the attractiveness of emerging markets for investors taking a medium to long term investment outlook.

However, emerging markets can be very volatile.  Investors need to maintain a balance between wrecklessly pursuing returns and true global diversification.

Now, investing in international ETFs alone would simply be performance chasing.  Besides, many ETF investors have started to make the move back home investing more in US markets.  As we mentioned in a previous story, for the first time this decade, the US stock market and ETFs are outperforming their international counterparts.  It is also important to note that hardly any funds investing in a single country are above their trend lines as of late.

However, some International/global ETFs to consider include:

• Vanguard FTSE All-World ex-US ETF (VEU), down 23.6% year-to-date
• iShares MSCI EAFE Index (EFA), down 23.4% year-to-date.
• ELEMENTS Rogers Intl Commodity Agric ETN (RJA), down 5.8% year-to-date
• iShares S&P Global Healthcare (IXJ), down 8.5% year-to-date

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