While the ideal international allocation is a hotly-debated topic and pretty much everybody you ask will have a different opinion. practically everybody agrees you should allocate at least a portion of your investment dollars overseas.  I personally devote 50% of my equity allocation to international stocks (see my Roth IRA allocation ), but that number is by no means appropriate for everybody.

Like all best-of-type lists, this one is sure to leave out some great funds.  Furthermore, you should never buy any investment solely on the recommendation of somebody else, even somebody you trust.  I strongly recommend you sign up for a free Morningstar account and research the following funds yourself before making any purchasing decisions.  Even the best funds can lose money.  All figures are accurate as of 1/8/2010.

Five Best International Mutual Funds For Your IRA

Vanguard FTSE All-World ex US Index Fund (VFWIX ) Broadly-diversified, total market index funds should form the core of any portfolio, and Vanguard is still the king of indexing despite recent attempts by competitors.  And indexing works just as well abroad as it does domestically.  While VFWIXs expense ratio is a bit on the high side at 0.40% and sports a 2% redemption fee if held less than 2 months, Vanguard has a reputation for lowering expenses as its funds grow.  VFWIX is still young and I expect expenses to come down quite a bit over the next few years.  Meanwhile, the redemption fee should be of no concern for long-term buy-and-hold investors.  While the Vanguard Total Stock Market Index Fund (VGTSX ) is slightly less expensive, it doesnt own Canadian investments due to a quirk of the index it tracks.  As Canada is one of the worlds richest countries, I definitely want exposure to its stock market. See When To Use Vanguard FTSE All-World Ex USA Index Fund Versus Vanguard Total International Index Fund for more on the subject.

Vanguard International Explorer (VINEX ) This fund recently re-opened to new investors after a long stint of unavailability.  VINEX has ranked in the top 21% of all small/international mutual funds over the last 10 years, putting up respectable total return numbers during a decade when most funds struggled to keep up with inflation.  This fund’s recent reopening is a great chance for investors to get actively-managed small-cap international exposure for the low, low price of just 0.36% per year (an ER practically unheard of for this asset class).

Vanguard FTSE All-World ex US Small Cap Index Fund (VFSVX ) Finally, Vanguard debuted a small-cap international index fund !  Okay, so this fund sports a 0.78% expense ratio, which is quite high for Vanguard and for index funds in general.  But its still far below average for an international small-cap fund, and like the fund above, I expect costs to come down dramatically as the fund grows its assets under management.  The Vanguard International Explorer fund mentioned above could be used as a cheaper substitute for this fund, but VINEX is really more of a mid-cap than a small-cap fund, and is more subject to asset bloat and style drift .

Dodge And Cox International Stock (DODFX ) Since launching its first fund in 1931 (the excellent Dodge and Cox Balanced Fund (DODBX )), Dodge and Cox has introduced a grand total of only 5 different mutual funds, all of them still in operation.  While most other companies were rushing to introduce gimmicky funds, Dodge and Cox stayed true to their ideals.  It worked.  Like its brethren, DODFX has consistently performed in the top 10% of its category since its inception.  Its low (for an actively-managed fund ) expense ratio of just 0.64% certainly hasnt hurt its performance numbers.  This fund does tend to throw off a lot of taxable gains, but this shouldnt be much of a concern if held inside an IRA.

Oakmark International (OAKIX ) I generally dont like actively-managed funds, especially not funds this expensive (1.10%), but theres no denying Oakmark International has knocked the ball out of the park over the last decade.  In fact, OAKIX has performed in the top 1% of all international mutual funds over the past 10 years.  Will this funds out-performance continue going forward?  Nobody knows for sure, but one thing is certain:  this fund definitely isnt a closet index fund.  This is a high-risk pick, so I wouldnt recommend allocating more than 10-20% of your international allocation to it.