Find the Right International ETF for Your Portfolio

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Exchange-traded funds (ETFs) are the fastest growing investment vehicle in the world, growing from just 30 funds in 1999 to more than a thousand in 2011. With the ability to invest in a basket of stocks in a single transaction, the securities are easy-to-use and offer instant diversification. They are so easy to use that most ETF buyers are self-directed investors, according to a Cogent Research study .

For international investors, international ETFs are more than convenient, they are a necessity. Foreign stock exchanges. currency conversions and investment tax laws make direct investment abroad very difficult for the average investor. Meanwhile, only a limited number of large companies trade on U.S. stock exchanges via American Depository Receipts (ADRs).

Types of International ETFs

There are several different types of international ETFs designed to give exposure to specific regions, countries, markets or asset classes. Investors looking for broad exposure to international markets through ETFs may want to consider broad international equity ETFs, while those with a specific investment thesis can gain exposure to specific countries or industries.

Here are some of the common classifications:

• Global ETFs invest in all developed or developing equity markets around the world.
• Regional ETFs invest in specific regions, like Europe, Asia or the Middle East.
• Country ETFs invest in specific countries, like China or Turkey.

• Index ETFs invest in specific indices within a country, like Germany’s DAX.
• Asset Class ETFs invest in specific asset classes within a country, like small cap stocks.
• Sector ETFs invest in specific sectors within a country, like consumer goods or energy.

Most Popular International ETFs

Investors looking for a simple way to diversify with international ETFs have many choices. For instance, the ACWI (All Country World Index) includes the United States and a basket of other developed and developing countries around the world.

The five most popular international ETFs by trading volume are:

• iShares MSCI EAFE Index ETF (EFA )
• Vanguard MSCI EAFE ETF (VEA )
• Vanguard FTSE All-World ex-US ETF (VEU )
• iShares MSCI ACWI ex-US Index ETF (ACWX )
• Schwab International Equity ETF (SCHF )

Choosing the Right International ETF

There are many important things to keep in mind when choosing the right international ETF for your portfolio, ranging from the ETFs holdings to its fee structure.

Here are three of the most important things to watch out for:

• Look at Diversification. Many international ETFs, such as the MSCI EAFE indices, have high exposure to Japan and the United Kingdom. While these countries may be relative safe-havens, their performance correlates to U.S. markets more than smaller emerging markets.
• Develop a Strategy. International investors looking at regional or country specific ETFs should develop an investment thesis and keep up with the latest news. For instance, a hot market in China can quickly unravel with higher interest rate or reserve requirements.
• Consider the Costs. All ETFs and international ETFs charge management fees that vary widely. Investors should take a look at these fees, especially in lesser-known country or industry specific ETFs that may have higher management costs.