Exchange-traded funds present many advantages to the average investor. They provide risk protection of a diversified portfolio — similar to a mutual fund, but with lower costs. The managing company doesn't spend money on maintaining client records and handling client problems because ETFs trade like stock. Transfer agents and brokers handle all the administrative tasks. Morningstar, the leading rating agency for mutual funds and ETFs, finds that the lower the fund's internal expense ratio, the more successful the fund's performance.
If you want to diversify your portfolio to take advantage of the growth prospects in lesser developed countries, international ETFs provide easy access, professionally selected stocks, liquidity and the protection of U.S. securities regulations. AMEX, the former American Stock Exchange, is the primary exchange for exchange-traded funds. The larger ETFs, such as iShares, provide a good platform for international investing activities by investors who don't have institutional access to currency trading and securities analysis, but who feel they can trade based on geopolitical and economic trends.
Morningstar provides a wealth of information on the various international ETFs, with advice on the suitability of each ETF for your particular risk tolerance, the makeup of the portfolio, whether it is under valued or over valued in the marketplace and its potential for price appreciation. Before buying an ETF, take advantage of the information available online from respected sources like Morningstar and various financial news sites. The AMEX provides information on the ETF issues traded through that exchange.
Although you might think a broadly defined international ETF will give you enough diversity in its country holdings to protect you against unforeseen geopolitical events in any one area of the world, that may not be the case. Many global funds have large concentrations in individual countries such as the United Kingdom and Japan. If you invest in a fund that specializes in a single country or region, you probably are better protected than relying on a global fund to protect you through diversification. At least you can quickly sell the ETFs in a fund of a particular country if you feel that country is facing unsettling times.
What to Look For
Look for performance divergence from the U.S. markets. Many countries, including the United Kingdom and Japan, tend to trade in tandem with U.S. markets. If you are going to buy a fund that moves with U.S. markets, you might as well keep your investing domestic. Seek ETFs that invest in countries not involved in current crisis situations. Also invest in the ETFs of larger, well-capitalized sponsors that have a track record of good performance. Before spending your money, check news from the AMEX regarding any ETF you plan to buy .
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