By: Paul A. Werlin, President, Human Capital Resources, Inc.
When it comes to world-awareness, Americans can be short-sighted. It’s hard enough to follow US companies, economic policy, taxation, and interest rates here at home. But there clearly are opportunities to make smart investments in international companies and markets. Many investment professionals recommend that portfolios have some exposure to overseas markets as a way to further diversify your portfolio as well as take advantage of unique buying opportunities. So, what are some of the ways to invest in foreign countries and companies?
It’s actually pretty difficult to directly buy stock in a foreign company. First, there’s placing an order on a foreign exchange like the London Stock Exchange, or Japan’s Nikki Exchange. Next, you will need to pay for your purchase by converting your dollars (subject to exchange rates and fees) to the local currency, then wire the funds (and pay more fees). But there’s a much simpler and convenient way- buy stock in foreign companies that trade on US exchanges by means of so-called ADRs, American Depository Receipts. ADRs are a form of equities that were created specifically to simplify foreign investing for Americans.
An ADR is issued by an American bank or broker and represents one or more shares of foreign-company stock held by that bank in the home stock market of the foreign company. The ratio of foreign shares to one ADR will vary from company to company, but each ADR for any one company will represent the same number of shares. ADRs may be listed on a major exchange such as the New York Stock Exchange or may be traded over the counter (OTC).
Those that are listed can be bought and sold just like shares of US-based companies. ADR’s allow you to place an order through your broker and pay in US dollars like any other stock. ADR investors are not subject to non-US stock transaction taxes. And if that country has a tax treaty with the US, dividends are paid without foreign withholding. However, like investment gains or income from domestic securities, proceeds from the sales of ADRs may be subject to US income or capital gains taxes and may be subject to backup withholding. Some of the more well-known foreign companies that have ADRs include Alibaba (China), Nokia (Finland), Royal Dutch Shell (UK) Credit Suisse (Switzerland), Sony and Toyota (Japan). In short, ADRs are an easy way to invest in foreign companies.
But what if you aren’t comfortable buying individual stocks or want expert help in picking countries and companies to invest in? That’s where mutual funds and ETFs come in. There are 5 types of international mutual funds:
Global funds focus on companies in a particular sector (like “energy”, or “transportation”) from countries all over the word.
Global funds may have a specific theme like emerging markets across the world.
Funds that invest in just one country like a Japan fund.
Regional funds that focus on a specific region like Africa, or South America.
5. Global funds that invest in companies from anywhere in the world including the USA. Like all other mutual funds, these funds can have several types and amounts of sales charges (also called “loads”). You can check online at sites like Morningstar.com or at fund company websites.
Exchange Traded Funds, (ETFs) are a great way to add international diversification. From ETFs that invest in companies from just one country to funds that focus on specific sectors in many countries. And, like all ETFs, they can be bought through your brokerage firm and the fund managers take care of the specific investment selections and all the administrative work. US News & World Report has some useful information and recommendations on international ETF investing.
International investing can seem complicated and confusing, and you might wonder if it’s worth the trouble. The short answer is yes — it’s definitely a way to potentially boost returns and lower your portfolio risk. And there’s lots of help available from mutual fund companies, brokerage firms and Financial Advisors. So, broaden your horizons and think and invest globally.