As of this writing, financial markets have been very volatile. Even so, the Standard & Poor’s 500 Index, a benchmark for the U.S. stock market, has gained over 70% in the past five years. A common measure of foreign stocks, the MSCI Europe, Australasia, and the Far East (EAFE) Index, has gained less than 10% for that period. Thus, U.S. stocks generally have gained much more than their foreign counterparts since the financial crisis of 2008–2009.
Consequently, some observers believe that foreign stocks offer better value than domestic issues today. You may wish to hold a portion of your investment portfolio in non-U.S. equities. Your strategy might call for investing through a stock fund for broad diversification and professional asset management.
Defining global and international
When investing in foreign stocks, your investment choices include global and international funds. Although the terms might sound similar, they refer to two different types of stock funds.
- Global funds, also known as world funds, typically invest in the shares of any company in the world. That includes stocks of U.S. corporations.
- International funds, sometimes called foreign funds, generally invest only in companies based outside of the United States.
An international fund, for instance, might invest in Germany’s Volkswagen, Korea’s Samsung, and Royal Dutch Shell, while a global fund might hold Volkswagen, Samsung, and the U.S. company ExxonMobil. Seeing “international” or “global” in a fund’s name usually will indicate how it invests, but you should check its holdings before you invest, so you’ll know which path you’ll be following.
The case for going global
Investing in a global fund can be a one-stop solution to your quest for stock market exposure. You’ll participate in the U.S. market as well as in foreign equities with a single, all-purpose fund.
Moreover, the managers of global funds typically are unconstrained. They can invest in the companies they like best, regardless of where a given company happens to be based. Why exclude an extremely promising stock just because the corporation happens to have a U.S. headquarters?
Investing in what they know
Alternatively, some observers point out that the world is a big place, perhaps too big for one fund manager
(or one team of co-managers) to cover adequately. A fund manager who concentrates solely on U.S. stocks may be more likely to find gems here than a manager whose stock scan extends to Australia and Zimbabwe.
Similarly, a fund manager who doesn’t have to follow the huge U.S. market might be more able to uncover winners in Europe or Japan. An investor who follows this line of reasoning may prefer to invest in one or more funds focusing on the U.S. market as well as one or more funds that limit their selections to foreign stocks.
There is no right or wrong answer to the global-vs.-international question. There are some global funds with excellent records and some that have not served investors well; the same can be said for international funds. The key is to understand the difference between these modes of investing in foreign stocks, and to make an informed decision about where your dollars will be going.