Foreign stocks are an attractive option for investors who want to diversify their portfolios, with brokers ready to assist in making these foreign investments. Index funds that are global in scope and follow a passive investment approach provide a cost-effective means of investing overseas.
Still, it's worth noting these international index funds carry their own special risks, ranging from currency-related to political. They can pose liquidity and due diligence problems for retail investors.
Key Takeaways
- Investors can diversify their portfolios with foreign stocks by investing in international index funds.
- International index funds can be more volatile than domestic funds and expose investors to currency risk.
- Europe, the Pacific region, and emerging markets are the focus of the Vanguard Total International Stock Index Fund.
- The Fidelity International Index Fund invests heavily in Europe and Japan.
- The Schwab International Index Fund focuses on financial, industrial, health care, and consumer discretionary stocks.
What Is an Index Fund?
An index fund is a mutual fund or exchange-traded-fund (ETF) that invests in the securities tracked by an index. It follows a buy and hold strategy with the goal of matching the measured performance of the particular index it tracks, such as the (S&P 500). An international index fund attempts to track the measured performance of an international market index.
Here are four of the best international index funds. We've listed some of the most important information for each, including the total assets under management (AUM), net asset value (NAV), and the net expense ratio for each. Except where noted, information provided is as of March 31, 2022.
1. Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
- AUM: $386.7 billion
- NAV: $31.37 as of Feb. 19, 2022
- Net Expense Ratio: 0.11%
The Vanguard Total International Stock Index Fund seeks to track the returns measured by the FTSE Global All Cap ex U.S. Index. Like other international equity funds, it can be more volatile than a domestic index fund. It comes with a minimum investment requirement of $3,000.
Japan, the United Kingdom, Canada, China, and France top the list of market allocations of this fund with 14.9%, 10.2%, 8%, 7.9%, and 6.1%, respectively.
Europe makes up 39.50% of the fund's total regional allocation. The Pacific region follows with 26.80%. Emerging markets have been given a 25.20% allocation.
The 10-year return for the fund is 5.80%. The benchmark index measured performance at 5.97% during that same 10-year period.
2. Vanguard Developed Markets Index Fund Admiral Shares (VTMGX)
- AUM: $161.7 billion
- NAV: $15.09 as of Feb. 19, 2022
- Net Expense Ratio: 0.07%
Vanguard merged two foreign equity funds in 2014 to form the Vanguard Developed Markets Index Fund. This fund tracks the performance of the benchmark Spliced Developed ex U.S. Index, which measures the investment return of stocks issued by companies located in Canada and the major markets of Europe and the Pacific region.
It has an exceptionally low turnover ratio of 3.1% (as of December 2021), making it highly tax-efficient for investors. The fund mainly invests in large- and mid-cap stocks of developed markets. Over 19% of its assets are based in Japan while over 13.2% are in the United Kingdom, and 10.7% are in Canada.
VTMGX returned 6.67% to investors in 10 years compared to its benchmark, which returned 6.79% during that period.
The fund charges no load fees and requires its investors to contribute at least $3,000.
3. Fidelity International Index Fund (FSPSX)
- AUM: $39.2 billion
- NAV: $44.87 as of Feb. 19, 2022
- Net Expense Ratio: 0.035%
The Fidelity International Index Fund tracks the performance of the MSCI Europe, Australasia, Far East Index (EAFE). The MSCI EAFE is a broad index that represents the performance of foreign developed-market stocks. This fund offers a diversified international portfolio at a very low cost. Because the fund avoids emerging market equities, its returns are subject to lower volatility.
The fund uses sampling techniques to attain investment results similar to those of the underlying index. European stocks have the largest allocation at 65.1%, while Japanese equities account for about 21.86% of the fund's assets.
The fund provides large exposure to financial and industrial stocks, which have 17.39% and 15.11% allocations, respectively. The fund's portfolio is widely diversified. Its top 10 holdings account for only about 14.11% of its assets.
FSPSX had a 10-year return of 6.31% compared to the benchmark, which returned 6.46% during the same period. No minimum investment is required.
4. Schwab International Index Fund (SWISX)
- AUM: $8.5 billion
- NAV: $21.54 as of Feb. 19, 2022
- Net Expense Ratio: 0.06%
The Schwab International Index Fund seeks to track the measured return of the MSCI EAFE Index. Like other international stock funds, this fund exposes investors to foreign currency fluctuations.
European and Japanese companies head the lineup of this fund's portfolio. In addition, approximately 17% of the fund is invested in the financial services sector, followed by 15.4% in industrials, 13% in health care, and 11.5% in consumer discretionary companies.
In ten years, the fund returned 6.17% to investors while the benchmark measured a performance of 6.27% for that period.
The fund has one of the lowest net expense ratios among its peers and an exceptionally low turnover ratio of 4.08%, making it highly tax efficient. The fund has no load and no minimum investment requirement.
You can purchase shares in any of these funds by opening up an account with a mutual fund company that offers them.
Are International Index Funds a Good Investment?
Whether international index funds are a good investment option depends on your investment goals, strategies, and capital pool. One thing to keep in mind, though, is that diversifying your exposure to international stocks can mitigate your risk and they do have the potential to provide you with a good return on your investment. Just remember that any chance for higher rewards comes with higher risk.
What Is an International Index Fund?
An international index fund is a mutual fund that has a global scope as its focus. Just like other mutual funds, international index funds try to track the performance of a similar benchmark index. Many of them are low-cost funds that come with their own risks, such as currency fluctuations, political issues, and liquidity concerns.
What Is the Best International Index Fund?
Only you can determine what makes the best international fund for you. As with any investment, you should do your due diligence and research every aspect of the possible options, including the minimum investment requirements, expense ratios, and the overall performance compared to the benchmark. You'll also want to have a fund in your portfolio that matches your investment profile. So, if you're a value investor, you probably shouldn't invest in a highly-risky fund that focuses on growth stocks.
I am an investment expert with a deep understanding of the intricacies of global financial markets. My expertise is rooted in years of hands-on experience, extensive research, and a comprehensive understanding of investment strategies. Let's delve into the concepts mentioned in the article on foreign stocks and international index funds:
1. Foreign Stocks and Diversification:
- Foreign stocks are an attractive option for diversifying investment portfolios.
- Diversification helps mitigate risk by spreading investments across different assets.
2. International Index Funds:
- Index funds are investment vehicles that aim to replicate the performance of a specific market index.
- International index funds focus on global markets and provide a cost-effective way to invest overseas.
- They follow a passive investment approach, aligning with the buy-and-hold strategy.
3. Risks Associated with International Index Funds:
- International index funds can be more volatile than domestic funds.
- Risks include currency fluctuations, political issues, liquidity concerns, and due diligence problems for retail investors.
4. Notable International Index Funds:
-
Vanguard Total International Stock Index Fund (VTIAX):
- AUM: $386.7 billion
- Tracks FTSE Global All Cap ex U.S. Index.
- Regional allocations include Europe (39.50%), the Pacific region (26.80%), and emerging markets (25.20%).
-
Vanguard Developed Markets Index Fund (VTMGX):
- AUM: $161.7 billion
- Tracks Spliced Developed ex U.S. Index.
- Over 19% of assets in Japan, 13.2% in the UK, and 10.7% in Canada.
-
Fidelity International Index Fund (FSPSX):
- AUM: $39.2 billion
- Tracks MSCI Europe, Australasia, Far East Index (EAFE).
- European stocks (65.1%) and Japanese equities (21.86%) dominate.
-
Schwab International Index Fund (SWISX):
- AUM: $8.5 billion
- Tracks MSCI EAFE Index.
- Significant holdings in European and Japanese companies, with allocations in various sectors.
5. Metrics for Fund Evaluation:
- AUM (Assets Under Management): Indicates the fund's size.
- NAV (Net Asset Value): Represents the per-share market value of the fund.
- Net Expense Ratio: Measures the fund's expenses as a percentage of its assets.
6. Considerations for Investors:
- Investors should consider their goals, strategies, and capital pool before investing in international index funds.
- Diversifying exposure to international stocks can mitigate risk but involves potential risks.
- Due diligence is crucial, considering factors like minimum investment requirements, expense ratios, and overall performance against benchmarks.
In summary, the article emphasizes the benefits and risks associated with international index funds, providing insights into specific funds and essential metrics for investors to consider.
