What are International ETFs?

What are International ETFs?

The underlying benchmark index that international exchange-traded funds (ETFs) are generally passively invested in can differ extensively between fund managers. By investing in a few hundred companies, some funds—most prominently those with a global presence or those investing in developed economies in countries—can deliver extensive diversity. International ETFs are available to suit most portfolios, like those with a dividend-generating orientation.

Foreign ETFs with investments in numerous countries can be safer than ETFs with investments in a single foreign country. A fund with investments in only stocks from a single country can have a large performance difference in case that country has a serious recession or other economic issues.

Due to robust international growth, international exchange-traded funds (ETFs) are increasingly being sought out by U.S. investors. Increasing foreign investment is being facilitated in other finance markets due to developments in finance regulation and globalization. Foreign ETF fee ratios are typically higher than average since foreign investment is more expensive.
 

How Do International ETFs Work?

Foreign ETFs invest in foreign shares, exposing Indian investors to international markets. They can replicate international, regional, or country-based indexes and can hold shares, bonds, or other investments. They diversify investments, reducing geographic and political risks. However, they have a more expensive cost ratio due to the complexities of overseas investing.

Who Should Invest in International ETFs?

Indian investors looking to diversify beyond domestic markets can benefit from international ETFs. These funds provide exposure to foreign economies and sectors, creating growth opportunities while helping to reduce overall portfolio risk. International ETFs are particularly suited for investors seeking to hedge against country-specific risks and capitalize on global economic trends. However, investors should remain mindful of currency fluctuations and geopolitical risks.

What are the Key Factors to Evaluate in International ETFs

When investing in international Exchange-Traded Funds (ETFs), it is important to evaluate various factors to ensure they align with your investment objectives and risk tolerance. Below are crucial considerations before investing in international ETFs:

1. Regional Focus:
Different international ETFs concentrate on specific markets or geographic regions. Some ETFs track developed markets such as the US, Europe, or Japan, while others focus on emerging markets like China, India, or Latin America.
It is essential to determine whether you want exposure to a specific region or a diversified investment across multiple regions. If you seek stability and steady growth, ETFs targeting developed economies would be ideal. On the other hand, if you are willing to take on higher risk for greater growth potential, emerging market ETFs may be a more suitable option.

2. Currency Diversification
International ETFs expose you to foreign currencies, adding an extra layer of diversification. However, currency fluctuations can significantly impact your returns. If the foreign currency strengthens relative to the Indian Rupee (INR), you may benefit from favorable currency movements.
Conversely, if the foreign currency weakens against the INR, it could erode your investment returns. Therefore, understanding the impact of currency movements is critical. Some ETFs offer currency hedging strategies to protect against this risk, while others may leave you exposed to exchange rate fluctuations.

3. Expense Ratios
One of the major advantages of ETFs is their low-cost structure compared to mutual funds. However, international ETFs may have higher expense ratios due to the added complexity of investing across borders.

It is essential to compare the expense ratios of different ETFs to ensure that you are not paying excessive fees that could eat into your returns. Opt for low-cost international ETFs with competitive expense ratios to maximize your long-term investment performance.

4. Liquidity
Liquidity refers to how easily an ETF can be bought or sold in the market without impacting its price significantly. High liquidity is essential for investors who want to quickly enter or exit positions.
International ETFs can sometimes have lower liquidity compared to domestic ETFs, which could result in higher transaction costs and price slippage. Ensure the international ETF you are considering has sufficient liquidity to facilitate smooth trading.

What are the Long Term Value of International ETFs

International ETFs have the potential to significantly lower your portfolio's overall risk over time while giving you access to other markets' development prospects. Maintaining diversification across several areas and industries is crucial. By doing this, you can avoid becoming unduly exposed to any one market or currency.

By diversifying with foreign exchange-traded funds (ETFs), you can also benefit from cutting-edge industries like biotechnology, renewable energy, and artificial intelligence that may not be as well-established in India. International exchange-traded funds can help you position your portfolio for long-term success by providing exposure to these areas, which are expected to see significant growth in the years to come.
 

Conclusion

While international ETFs offer diverse opportunities, evaluating factors such as regional focus, currency diversification, expense ratios, and liquidity is essential. By considering these elements, you can make a more informed decision and tailor your investment strategy to suit your financial objectives.