A practical guide to investing internationally

Chris discusses the case for international investing through a core-satellite approach with specific countries.

Given the strong performance of U.S. stocks in recent years, it is no surprise that investors have some skepticism when it comes to international investing. In fact, behavioral economists refer to the fact that investors often focus on domestic stocks in their equity portfolios and limit international stocks as “home country bias.”  Nonetheless it is important to remember international investing offers two major benefits:

Benefits of international investing

1. Diversification.

December’s volatility in the U.S. brought home the importance of having some exposure to stocks outside the U.S. when emerging markets outperformed the U.S. Indeed, historically, U.S. and international stocks have gone through periods where one region outperforms the others. Combining assets that don’t move in lockstep can lead to a reduction in volatility in the portfolio for the long run.

Cycles of relative outperformance

2. Access to growth.

International economies–particularly emerging countries–may offer faster rates of economic growth than the United States (Source: IMF World Economic Outlook, January 2019). For example, in emerging markets, a growing middle class and developing infrastructure can help generate wealth and dynamic companies with significant growth potential. And developed countries are already home to many world-class companies that U.S.-only investors could be missing in their portfolios.

To be sure, investing in international stocks brings risk, including currency exposures and geopolitical risks. The good news is that there are ways to potentially mitigate (but obviously never eliminate) those risks using a “core-satellite” strategy.  This refers to a portfolio with a broad exposure (core) to an asset class while enabling the flexibility to adjust to current market conditions with country investing (satellite). Many investors do that in their portfolios with sectors.

A country core-satellite approach can be approached in a number of ways:

Managing strategic core exposures.

A non-U.S. allocation in a broad benchmark typically has significant concentration in just a few countries such as Japan, the U.K., and China.  Allocation changes to these countries, typically as a result of views on macroeconomic events, regime changes or other trends, can have a significant impact on risk and return.

Managing currency exposures.

The currency risk in international investing can be significant. For U.S. investors, a currency’s strength or weakness versus the dollar can either amplify or dampen returns from that country. Currency hedged products can help mitigate that risk, but investors should be cautious, because currency exposure can actually add diversification properties in a portfolio in some instances.

Implementing macro themes.

With a core-satellite approach, tactical macroeconomic or relative value views are typically expressed in the satellite allocation. These can include commodity cycles, U.S. dollar cycles, and regional growth dynamics; understanding how they affect individual countries is key. For example, a tilt towards commodity producing countries can potentially boost returns when commodity prices are high (or vice versa).

Managing political event risk.

Geopolitical events are another area where investors can manage risks or exploit potential opportunities in countries. For example, elections are frequently a focal point for emerging market investors as policy swings, economic reforms, and changing sentiment play an out sized role compared to developed markets.  Such patterns create risks, but also opportunities by tactical tilts, hedging the FX exposure, or some combination thereof.

For many investors, a broad, index exposure for non-U.S. regions may be appropriate, but it does come with drawbacks, specifically a large allocation to a few large countries, which can increase risk. But investors have a range of ways to invest internationally and tailor their approaches to meet their goals and with their own tolerance for risk in mind. In this effort, country exchange traded funds (ETFs) can be a powerful tool. The precision exposure offered by country ETFs enables a tremendous flexibility in the range of applications and level of sophistication.

Chris Dhanraj is the Head of the iShares Investment Strategy team and a regular contributor to The Blog.

Related iShares funds

(EWC) iShares MSCI Canada ETF

(EWJ) iShares MSCI Japan ETF

(HEWJ) iShares Currency Hedged MSCI Japan ETF

(EWG) iShares MSCI Germany ETF

(EWU) iShares MSCI United Kingdom ETF

(MCHI) iShares MSCI China ETF

(INDA) iShares MSCI India ETF

(EWZ) iShares MSCI Brazil ETF

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

A fund’s use of derivatives may reduce a fund’s returns and/or increase volatility and subject the fund to counter-party risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. A fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited.  There can be no assurance that any fund’s hedging transactions will be effective.

Diversification and asset allocation may not protect against market risk or loss of principal. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.  The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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