What Is an International ETF?

Most investors naturally hold a lot of companies from their own country, a tendency called home bias. An international ETF holds companies based elsewhere, so a US investor can own large European and Asian businesses, and the reverse for investors abroad, through a single fund.

Some international ETFs cover the entire world outside your home market, while others focus on a specific region or country. The goal is to spread your investments across more of the global economy.

International funds usually split the world into two groups. Developed markets are wealthier, more established economies such as Japan, the United Kingdom, and Germany, which tend to be relatively stable. Emerging markets are faster-growing but less mature economies such as India, Brazil, and parts of Southeast Asia.

Emerging markets offer more growth potential but also more risk and bigger swings. Many broad international ETFs include both, while others let you choose one or the other.

When you own foreign companies, your returns depend partly on currency movements. If the foreign currency strengthens against your own, your returns get a boost, and if it weakens, your returns are reduced, even if the underlying stocks did not move.

This currency exposure adds another layer of ups and downs, which can help or hurt in any given year. Over the long term it is simply part of investing abroad.

The main reason is diversification. No single country leads forever, and spreading investments across many economies reduces the risk of being too dependent on one. An international ETF is the simplest way to correct a portfolio that is concentrated at home.

Different regions also lead at different times, so holding international stocks can smooth returns over the long run, even though one market may lag in any given period.

International investing carries risks a home-market fund may not, including currency swings, different regulations and accounting, and political or economic instability, especially in emerging markets. US stocks have also outperformed many international markets in recent years, though leadership has shifted in the past.

These funds are best viewed as a long-term diversifier rather than a short-term bet on any one region. Pairing one with a domestic fund is a common way to build a global portfolio.