Key Takeaways
- Diversifying beyond U.S. stocks reduces home‑country concentration and captures growth in non‑U.S. markets through ADRs, ETFs, and direct listings.
- Use international ETFs (e.g., $VEA, $VWO, $IXUS) or ADRs (e.g., $TCEHY, $NSRGY) for easy access; weigh liquidity, fees, and tax implications.
- Currency risk can materially change dollar returns, consider unhedged vs currency‑hedged ETFs depending on horizon and correlation assumptions.
- Allocate across developed and emerging markets deliberately (common ranges: 20, 40% international), and rebalance to maintain target exposures.
- Avoid common mistakes like geographic concentration, ignoring withholding taxes, and failing to assess liquidity and corporate governance.
Introduction
International investing means owning stocks, bonds, or funds whose economic exposure is primarily outside the United States. It includes developed markets like Japan and Germany, and emerging markets such as China, India, and Brazil.
For U.S.-based investors, international exposure matters because the U.S. market represents a large but not complete share of global economic growth and sectoral opportunity. Adding global holdings can lower portfolio volatility, improve long‑term returns through diversification, and provide access to sectors and companies underrepresented in the U.S.
This guide explains practical ways to invest internationally, ADRs, ETFs, direct listings, and covers developed vs emerging markets, currency risk, portfolio allocation strategies, tax and fee considerations, and actionable steps you can use when expanding beyond U.S. stocks.
Why Diversify Internationally?
U.S. equities have delivered strong returns over recent decades and currently constitute a sizeable share of global market capitalization. That success creates a tendency called "home bias," where investors overweight domestic stocks.
But global diversification offers three main benefits: exposure to different economic cycles, access to unique sectors (e.g., materials, autos, commodities), and potential risk reduction through lower correlations between markets. Over long horizons, these advantages can improve portfolio efficiency.
Developed vs Emerging Markets: Key Differences
Developed markets are generally larger, have deeper capital markets, stronger regulatory frameworks, and lower political risk. Examples include the U.K., Germany, Japan, and Switzerland (companies like $NSRGY / Nestlé).
Emerging markets offer higher growth potential but come with higher volatility, weaker liquidity, and elevated geopolitical and currency risks. Representative names include $BABA (Alibaba), $TCEHY (Tencent ADR), and commodity-oriented firms like $BHP.
How to Invest Internationally: Vehicles and Tradeoffs
There are four primary ways to get international exposure: American Depositary Receipts (ADRs), international ETFs, mutual funds, and direct foreign brokerage accounts. Each has advantages and tradeoffs around liquidity, cost, and complexity.
ADRs and Foreign‑Listed Stocks
ADRs are certificates issued by U.S. banks that represent shares of foreign companies and trade on U.S. exchanges in USD. Examples: $TCEHY (Tencent ADR), $BABA (Alibaba ADR), $NSRGY (Nestlé ADR).
Pros: trade in USD during U.S. hours, familiar settlement, simpler tax reporting. Cons: reduced shareholder rights, ADR program fees, and sometimes lower liquidity than domestic peers.
International ETFs and Mutual Funds
ETFs are the easiest route for broad exposure. Popular funds include $VEA (developed ex‑US), $VWO (emerging markets), $IXUS or $VXUS (total international). There are also regional ETFs like $VGK (Europe) and country funds for specific markets.
Pros: instant diversification, low cost, easy trading. Cons: tracking error, underlying liquidity, and potentially large sector tilts (e.g., many international funds overweight financials and energy relative to the U.S.).
Direct Foreign Listings and Brokerage Accounts
You can open international brokerage accounts to buy stocks listed on London, Tokyo, or Hong Kong exchanges. This provides direct access and often broader listings but increases complexity: foreign settlement, foreign currency trades, and different market hours.
For most retail investors, ETFs or ADRs offer the best balance of simplicity and diversification unless you need a specific foreign security not available via ADR or ETF.
Managing Currency Risk
Currency movements can boost or erode dollar returns. If an international stock rises 10% in local currency but that currency declines 5% versus the dollar, the dollar return is roughly 4.5% (1.10 * 0.95 - 1 = 0.045).
There are three common currency approaches: accept currency exposure (unhedged), use currency‑hedged ETFs, or hedge selectively. The right choice depends on your time horizon, view on currencies, and the cost of hedging.
When to Consider Hedging
Hedging can make sense for shorter horizons when currency volatility can dominate returns, or for bonds where income is predictable. Hedged ETFs often cost more in fees and can lag if the domestic currency weakens long‑term.
For long-term equity investors, many advisors prefer unhedged exposure because currency movements tend to mean‑revert and can contribute to diversification.
Allocation Strategies and Practical Examples
There is no single correct allocation; it depends on risk tolerance, investment objectives, and beliefs about future growth. Common starting points for U.S.-based investors are:
- Conservative tilt: 10, 20% international equity, still maintains home bias but gains some diversification.
- Balanced global: 30, 40% international equity, a meaningful allocation to developed and emerging markets.
- Global parity: 50%+ international equity, approaching market‑cap weights if you want to reflect global market capitalization.
Within your international sleeve, consider splitting developed vs emerging. A practical example: target 30% international equity with a 70/30 developed/emerging split, which equals 21% developed and 9% emerging overall.
Example Portfolio Scenarios
Example A, Conservative investor (target 20% international): 16% developed ($VEA/$VGK), 4% emerging ($VWO/$IEMG). This keeps volatility lower while providing exposure to Europe and Asia.
Example B, Growth‑oriented investor (target 40% international): 28% developed (broad ETFs + select ADRs like $NSRGY), 12% emerging (broad EM ETF like $VWO plus selected large ADRs such as $TCEHY). Rebalance annually to maintain risk profile.
Research Checklist: How to Evaluate International Holdings
Whether choosing an ADR or ETF, apply a consistent checklist to evaluate country, sector, and company risks.
- Economic fundamentals: GDP growth, inflation, and fiscal/monetary policy trends.
- Market structure: liquidity, trading hours, and listing venue (ADRs vs home market).
- Corporate governance: minority shareholder protections, transparency, and regulatory stability.
- Currency and repatriation risks: limits on capital flows or dividend remittances.
- Costs and taxes: expense ratios, ADR fees, and dividend withholding taxes.
Taxes, Costs, and Operational Considerations
Dividend withholding taxes vary by country; many countries tax dividends at source and U.S. investors may claim a foreign tax credit. ADR investors often have simplified reporting, but net dividends you receive can reflect withholding.
ETFs and mutual funds simplify tax reporting but can embed local taxes in fund distributions. Also watch bid‑ask spreads and liquidity, emerging market ETFs and single‑country ADRs can trade with wider spreads.
Real‑World Example: Currency Impact on a European Stock
Imagine you buy 100 shares of a European company via an ADR at €50, equivalent to $55 at initial EUR/USD = 1.10. The company’s stock rises 12% in euros to €56, but the euro weakens to 1.05 USD/EUR (≈4.5% depreciation). Your dollar return is approximately 6.7%: (1.12 * 1.05/1.10 - 1) ≈ 0.067. This shows a meaningful drag from currency moves even when the underlying business performed well.
Common Mistakes to Avoid
- Home bias: Overweighting U.S. stocks and missing non‑U.S. sector exposure. Avoid by setting and periodically reviewing target international allocations.
- Ignoring currency risk: Treat currency as an asset that can add or subtract returns. Decide if you want hedged or unhedged exposure and be consistent.
- Concentration risk: Buying a few large foreign names (or one country ETF) can leave you exposed to single‑country shocks. Diversify across countries and sectors.
- Overlooking fees and taxes: ADR programs and small international ETFs can carry higher implicit costs. Check expense ratios, spreads, and withholding taxes before investing.
- Trading illiquidity and hours mismatch: Trying to trade during U.S. hours for thin ADRs or foreign‑listed shares can lead to wide spreads or execution issues. Use limit orders and be mindful of liquidity.
FAQ
Q: How much of my portfolio should I allocate to international stocks?
A: There’s no single answer. Common starting points are 20, 40% for international equity depending on risk tolerance. Align allocation with your goals, diversify between developed and emerging markets, and rebalance annually.
Q: Should I use currency‑hedged ETFs?
A: Use hedged ETFs when you want to reduce short‑term currency volatility (common for bonds or shorter horizons). For long‑term equity investors, unhedged exposure often adds diversification and avoids recurring hedging costs.
Q: Are ADRs the same as buying the foreign company directly?
A: ADRs represent ownership of foreign shares deposited with a U.S. bank. They trade in USD and simplify settlement and tax reporting, but they can reduce shareholder voting rights and sometimes include ADR fees.
Q: How do taxes on foreign dividends work?
A: Many countries withhold tax on dividends paid to nonresident investors. U.S. taxpayers can often claim a foreign tax credit to offset double taxation. Check treaty rates for specific countries and consult a tax professional for complex situations.
Bottom Line
International investing is a practical way to reduce home‑country concentration and capture growth outside the U.S. Use ETFs and ADRs for simple access, and consider direct listings only when you need specific exposure. Balance developed and emerging market exposure according to your risk tolerance.
Manage currency, tax, and liquidity risks deliberately: choose hedging strategies when appropriate, review withholding tax impacts, and rebalance to keep allocations on target. Start with a clear allocation plan, use low‑cost diversified funds where possible, and add select ADRs for high‑conviction foreign names.
Next steps: define your target international allocation, pick a broad ETF or two (e.g., developed + emerging), review tax implications, and set a rebalancing cadence. International markets add complexity, but with a disciplined approach they can materially improve diversification and access to global growth.
