International ETFs allow you to invest in companies from around the world without the complexity of opening foreign brokerage accounts or dealing with foreign exchanges. In this guide, we will explain how international ETFs work, the different categories available, and how to build a globally diversified portfolio.
Why Invest Internationally?
The United States represents only about 60% of the global stock market. By investing only in US stocks, you are missing out on thousands of companies and entire economies.
Key benefits of international diversification:
- Access to faster-growing economies
- Reduced dependence on US market performance
- Exposure to different economic cycles
- Opportunity to invest in global industry leaders
Types of International ETFs
Total International Stock ETFs
These provide the broadest exposure to all non-US stocks:
- VXUS: Vanguard Total International Stock (most popular)
- IXUS: iShares Core MSCI Total International Stock
- VEU: Vanguard FTSE All-World ex-US
These ETFs hold thousands of stocks from both developed and emerging markets, providing comprehensive global exposure in a single fund.
Developed Markets ETFs
Focus on established economies with mature financial markets:
- EFA: iShares MSCI EAFE (Europe, Australasia, Far East)
- VEA: Vanguard FTSE Developed Markets
- IEFA: iShares Core MSCI EAFE
- SCHF: Schwab International Equity
Developed markets include Japan, United Kingdom, Germany, France, Canada, Australia, and other advanced economies.
Emerging Markets ETFs
Target rapidly growing economies with higher risk and reward potential:
- VWO: Vanguard FTSE Emerging Markets
- EEM: iShares MSCI Emerging Markets
- IEMG: iShares Core MSCI Emerging Markets
- SCHE: Schwab Emerging Markets
Emerging markets include China, India, Brazil, Taiwan, South Korea, and other developing economies.
Developed vs Emerging Markets
Developed Markets (EFA, VEA):
- More stable and less volatile
- Lower growth potential
- Better corporate governance
- Example countries: Japan, UK, Germany, France
Emerging Markets (VWO, EEM):
- Higher volatility and risk
- Higher growth potential
- Political and currency risks
- Example countries: China, India, Brazil, Taiwan
Regional ETFs
Target specific geographic regions:
- VGK: Europe (Vanguard FTSE Europe)
- VPL: Pacific region (Japan, Australia, etc.)
- AAXJ: Asia excluding Japan
- ILF: Latin America
- EEMA: Emerging Middle East and Africa
Single-Country ETFs
Focus on individual countries for targeted exposure:
- EWJ: Japan
- EWG: Germany
- EWU: United Kingdom
- FXI: China large-cap
- INDA: India
- EWZ: Brazil
- EWT: Taiwan
- EWY: South Korea
Understanding Currency Risk
When you invest in international stocks, you are exposed to currency fluctuations. If the US dollar strengthens against foreign currencies, your international investments lose value in dollar terms even if the stocks themselves perform well.
Hedged vs Unhedged ETFs
- Unhedged (default): You receive the full local market return plus or minus currency movements
- Currency-hedged: Uses derivatives to neutralize currency impact, so you only get the local stock market return
Currency Impact Example
Japanese stocks rise 10% in yen terms this year:
- If yen strengthens 5% vs dollar: Your return is approximately 15%
- If yen weakens 5% vs dollar: Your return is approximately 5%
- With hedged ETF: Your return is approximately 10% regardless
Long-term investors often prefer unhedged for diversification. Short-term investors may prefer hedged for more predictable returns.
Popular hedged international ETFs:
- HEFA: Currency-hedged EAFE
- HEWJ: Currency-hedged Japan
- HEDJ: Currency-hedged Europe
Building a Global Portfolio
How Much International Exposure?
Financial experts have varying recommendations:
- Conservative approach: 20-30% of equity allocation in international stocks
- Moderate approach: 30-40% international exposure
- Market-weight approach: 40% international (reflects global market cap)
Sample Global Portfolio Allocations
Simple Two-Fund Global Portfolio:
- 70% VTI (US Total Market)
- 30% VXUS (Total International)
More Detailed Global Portfolio:
- 60% VTI (US Total Market)
- 25% VEA (Developed International)
- 15% VWO (Emerging Markets)
Simple approach: For most investors, a total international ETF like VXUS provides excellent diversification without the complexity of managing multiple regional funds. It automatically includes both developed and emerging markets in market-cap proportions.
Advantages of International ETFs
1. Diversification
International markets do not always move in sync with US markets, reducing overall portfolio volatility.
2. Growth Opportunities
Many of the world's fastest-growing companies and economies are outside the US.
3. Valuation Differences
International stocks are often cheaper than US stocks by traditional valuation metrics like P/E ratios.
4. Easy Access
Trade on US exchanges during regular market hours. No need for international brokerage accounts.
5. Professional Management
ETF managers handle the complexities of investing across multiple countries and currencies.
Risks of International Investing
1. Currency Risk
Exchange rate fluctuations can help or hurt returns independent of stock performance.
2. Political Risk
Changes in government policies, regulations, or political instability can affect investments, especially in emerging markets.
3. Economic Risk
Different countries face different economic challenges including inflation, debt, and growth issues.
4. Liquidity Risk
Some international markets are less liquid than US markets, potentially leading to wider bid-ask spreads.
5. Regulatory Differences
Corporate governance standards and investor protections vary widely across countries.
Top International Holdings
When you buy a total international ETF, you are investing in global giants like:
- Taiwan Semiconductor (Taiwan): World's largest chip manufacturer
- Nestle (Switzerland): Global food and beverage company
- ASML (Netherlands): Semiconductor equipment leader
- Toyota (Japan): World's largest automaker
- Samsung (South Korea): Technology conglomerate
- Novo Nordisk (Denmark): Pharmaceutical giant
- LVMH (France): Luxury goods conglomerate
Track Your Global Portfolio
Pro Trader Dashboard helps you monitor your international ETF holdings and see your geographic allocation at a glance. Understand your exposure across different regions and markets.
Tips for International ETF Investing
- Start broad: A total international ETF is the simplest way to diversify globally
- Consider costs: International ETFs have slightly higher expense ratios than US ETFs
- Be patient: International stocks can underperform US stocks for years before outperforming
- Rebalance regularly: Maintain your target international allocation over time
- Understand your holdings: Know which countries and companies you own
- Think long-term: Short-term currency and political events should not derail a long-term strategy
Summary
International ETFs are essential tools for building a truly diversified portfolio. They provide access to thousands of companies and economies outside the United States, offering growth opportunities and reducing dependence on any single market. For most investors, a simple allocation of 20-40% to a total international ETF like VXUS provides excellent global diversification. While international investing comes with additional risks like currency fluctuations and political uncertainty, the long-term benefits of global diversification typically outweigh these concerns.
Ready to explore more investment options? Check out our guides on bond ETFs for fixed income diversification or ETF trading strategies for active approaches.