A Look at International ETFs

International ETFs are a way to provide an investor with additional diversity in their portfolio. An international exchange traded fund is based on an exchange of a foreign market such as the London or Hong Kong stock exchanges. Investing in these securities exposes an investor to the returns in the international market underlying the fund without the same level of corresponding risk. Investing in an index does not require you to purchase individual shares of the securities in the index.

What an Exchange Traded Fund Is

An exchange traded fund or ETF is a fund whose return is based on the performance of an underlying index. ETFs are generally traded on the NASDAQ over the counter trading system and can be found listed there. As a security, these investments carry the same level of risk as any other type of investments, including the possible loss of the amount put in the ETF.

ETFs base their returns on the returns of the underlying index. They are passively managed funds, which makes them different from mutual funds, which are actively managed. ETFs have lower fees and charges relative to a mutual fund and seek to match returns not outperform the market.

Spreading Out Exposure to Risk

When looking to diversify a portfolio in order to spread out its exposure to risk, international investing is something that is always recommended. In the case of using an international ETFs when investing in other ETFs such as those based on U.S. domestic stock indices (i.e. S&P 500 and Russell 2000 indexes) or bond indexes based on the 30-year treasury bond or long term corporate bonds provides a way to smooth out the risk/reward curve and balance out the portfolio’s returns.

Reasons to Consider International ETFs

Many companies doing business in the United States are based in other countries. Whether its car companies like Toyota or Daimler-Benz or Swiss chocolate maker Nestle and others, a lot of the products that are bought and consumed in the U.S. are made by companies that make up the various international indexes. Because of this, it makes sense to look to adding an international ETF (or considering the addition of this security) to a portfolio.

Differences between International ETFs and other ETFs

Investing in an international ETF is no different than investing in other types of ETF products. The principal difference is that an international ETF is based on an index of international securities, which can carry more risk relative to investing strictly in the U.S. stocks or bonds. ETFs are not directly invested in the securities that are in the index; instead they mimic the returns of that index.

If you look up the different ETFs that are listed on the NASDAQ, you should be able to compare their results with the index that they are based on. This will give you a sense of how the fund is structured and whether that particular international ETF is a good inclusion for your portfolio.

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