Standard & Poor’s downgrading its triple-A rating on U.S. government debt may cause more individual investors to consider international exchange traded funds to diversify their portfolios.
ETFs have made it much easier for U.S.-based investors to get exposure to foreign markets. These ETFs hold international stocks and trade in the U.S. while the underlying markets are closed.
Investors may wander further afield in international ETFs after the U.S. downgrade and sovereign debt turmoil continues to rock Europe.
Major U.S. companies are making plans to expand business overseas, while announcing lay-offs at home in the U.S. Don Lee for The Los Angeles Times reports consumers in Latin America and Asia are better prospects for profit and continuous future sales. [Consumer ETFs Search Overseas for Profit.]
“Strategically, the anticipated lay-offs of the corporate sector are evidence they already recognize that the financial and human capital will have to be where the demand is,” said Patrick O’Keefe, economic and research director at accounting and advisory firm J.H. Cohn. [Face Off: Developed and Emerging Markets.]
More reasons to invest overseas:
- If one country or region is performing badly, another is most likely doing well. By mixing up returns from several regions the performance within a portfolio will, on average, do better.
- Every country has a specific economic profile, and most are strikingly different than developed Western regions. For instance, India and China are experiencing their industrial revolution, and Russia’s economy is trending up as oil prices continue to rise.
- Currency diversification is important to a portfolio as well. Currencies can diverge over time, and this can give an investor more benefits of overseas economies than just the economic performance. Most ETFs do not hedge their currency exposure, so returns are based on the country’s currency versus the performance of the U.S dollar. [ETFs That Hedge Their Foreign-Currency Exposure.]
In general, most analysts and advisors are recommending that 20% of an investor’s portfolio is allocated to foreign countries. Some even suggest 35%. About two years ago, many advisors were saying investors should give about 5% to international investing and even up to one year ago, the average investor still only gave about 10% of their asset allocation to emerging markets. [Sector Highlight: Global ETFs.]
ETFs are giving investors a simple, one-stop investment to entire regions and countries. Broad-based emerging market funds are some of the most popular because of their high diversification benefits:
Tisha Guerrero contributed to this article.