The opening up of international funds through ETFs and other investing tools has allowed for investors to build portfolios entirely out of funds from countries they may have never physically been to. This shift from domestic investing has been supplemented with ETFs specifically designed for excluding the U.S. from their holdings to create an international fund and an interesting play for investors [for ETF industry news, sign up for the free ETFdb Newsletter].
These broad-based global ETFs are a great hold for investors looking to hedge their domestic portfolio and provide a convenient way to get exposure to both developed and emerging markets.
However, many of these funds do not cast as wide a net as they claim and may even hold half of their funds in the U.S. While the U.S. market is one of the most stable and highly invested in the world, too much attention to it could dilute the returns [Download Free Report: How To Buy The Right ETF Every Time].
The charts below highlight the concentration of firm coverage between two different international ETF strategies:
ACWI – The Global ETF
Designed to measure the performance of global equity markets, ACWI actually devotes almost 50% of its holdings to companies traded in the U.S. While these U.S. funds might be a great hold on their own, they often overwhelm the ETF and don’t allow for any impact from the international firms included [check out Where Does Your Mining ETF Dig?].
ACWX- The ex-US ETF
Unlike ACWX, the MSCI ex US Index Fund is devoted to measuring the performance of the international market and does so by holding no U.S.-based fund. This has allowed for much more even exposure to a number of developed economies, as well as featuring emerging markets more heavily. In the long run, ACWX is likely to have returns more closely related to the international average than ACWI, which would more closely mirror the U.S. equities market [also check out How Volatile Is Your Currency ETF?].
Investors should always look into the geopolitical structure in each country and its past actions, as these aspects could be a powerful indicator of a company’s success in that region.
Disclosure: No positions at time of writing.