These Big International ETFs Are Outperforming the S&P 500. How to Add This Exposure to Your Portfolio

The S&P 500, the undisputed king of stock market benchmarks, has long been the go-to for investors seeking solid returns. But what if I told you that some international ETFs are not only keeping pace but actually beating the S&P 500? Sounds intriguing, right? Well, it’s happening, and it might be time to shake up your investment strategy.

Why You Should Even Care About International ETFs

For years, the prevailing wisdom has been: “Invest in the US. It’s the strongest economy, the most innovative market, and it consistently delivers.” And for the most part, that’s been true. But putting all your eggs in one basket – even a big, shiny, American basket – is never a good idea. Diversification is key to managing risk and maximizing potential returns. Think of it like this: you wouldn’t eat the same meal every day, would you? Your portfolio shouldn’t be monotonous either.

The Power of Diversification: It’s Not Just a Buzzword

Diversification across different countries and regions can smooth out your portfolio’s performance. When the US market stumbles, other markets might be thriving. It’s a way to hedge your bets and reduce the impact of any single market’s downturn. Imagine your portfolio as a team of athletes. You wouldn’t want an entire team of sprinters; you’d want a mix of sprinters, long-distance runners, and weightlifters to cover all bases. That’s what international exposure does for your portfolio.

Beyond the S&P 500: Capturing Global Growth

The US market, while powerful, isn’t the only game in town. Companies in China, Europe, Mexico, and other regions are experiencing significant growth, fueled by different economic drivers and consumer trends. By limiting yourself to the S&P 500, you’re missing out on these opportunities. It’s like only watching one channel on your TV – you’re bound to miss out on some great shows.

Which International ETFs Are Crushing It?

Okay, so international ETFs are worth considering. But which ones are actually delivering the goods? While past performance is no guarantee of future results, a look at recent trends reveals some interesting leaders. Specifically, ETFs with significant exposure to China, Europe, and Mexico have been notching impressive returns.

China: The Sleeping Giant Awakens

China, with its massive population and rapidly growing economy, presents a compelling investment case. ETFs focused on Chinese stocks can offer exposure to companies driving innovation and growth in sectors like technology, e-commerce, and consumer goods. Think about the sheer scale of the Chinese market – it’s like a whole other world of opportunities.

Potential Risks of Investing in China

It’s important to acknowledge the risks involved. Regulatory uncertainty, geopolitical tensions, and concerns about data privacy are all factors to consider. However, the potential rewards can be substantial if you’re willing to navigate these challenges. Investing in China is like planting a seed in fertile ground; it might require some tending, but the potential for growth is immense.

Europe: A Continent of Opportunity

Europe, with its diverse economies and established markets, offers a different kind of appeal. ETFs focusing on European stocks can provide exposure to well-established companies in sectors like luxury goods, pharmaceuticals, and industrials. While Europe’s growth might be more moderate than China’s, it offers stability and diversification within a developed market. It’s like adding a seasoned veteran to your investment team – reliable and experienced.

Navigating the European Landscape

Keep in mind that Europe is not a monolithic entity. Each country has its own unique economic conditions and political landscape. Researching the specific holdings of a European-focused ETF is crucial to understanding its risk and potential return profile. Think of it as exploring a diverse continent; you need to understand the unique culture and customs of each country.

Mexico: Riding the Nearshoring Wave

Mexico, benefiting from its proximity to the US and the trend of “nearshoring” (moving manufacturing closer to home), is experiencing a surge in economic activity. ETFs focused on Mexican stocks can provide exposure to companies in sectors like manufacturing, logistics, and consumer goods. Mexico’s growth story is closely tied to the US economy, making it a potential beneficiary of increased trade and investment. It’s like investing in a rising tide – a force that lifts all boats.

The US-Mexico Connection

The relationship between the US and Mexico is complex and multifaceted. Understanding the political and economic dynamics between the two countries is essential for assessing the risks and opportunities of investing in Mexican stocks. Investing in Mexico is like partnering with a neighbor – you need to understand their strengths, weaknesses, and shared goals.

How to Add International ETFs to Your Portfolio: A Step-by-Step Guide

So, you’re convinced that international ETFs deserve a place in your portfolio. Now what? Here’s a practical guide to getting started:

Step 1: Assess Your Risk Tolerance

Before diving in, take a good look at your risk tolerance. International markets can be more volatile than the US market, so it’s important to understand how much risk you’re comfortable with. Are you a risk-averse investor who prefers steady returns, or are you willing to take on more risk for the potential of higher growth? Your risk tolerance is like your pain threshold – knowing it helps you avoid pushing yourself too hard.

Step 2: Determine Your Allocation Strategy

How much of your portfolio should be allocated to international ETFs? A common rule of thumb is to allocate a percentage of your portfolio to international stocks that reflects the global market capitalization. This ensures you’re not overly exposed to any single market. Think of it as balancing your diet; you need a mix of different food groups to stay healthy.

Step 3: Research and Select the Right ETFs

Do your homework. Research different international ETFs and compare their expense ratios, holdings, and past performance. Look for ETFs that align with your investment goals and risk tolerance. Choosing the right ETF is like choosing the right tool for the job; you need one that’s well-suited for the task at hand.

Step 4: Consider Dollar-Cost Averaging

Instead of investing a large sum all at once, consider dollar-cost averaging. This involves investing a fixed amount of money at regular intervals, regardless of the market price. This can help to reduce the risk of buying high and potentially improve your overall returns. Dollar-cost averaging is like slowly wading into a pool; it allows you to adjust to the temperature gradually.

Potential Downsides to Consider

While international ETFs offer numerous benefits, it’s important to be aware of the potential downsides.

Currency Risk

Fluctuations in currency exchange rates can impact the returns of international ETFs. If the US dollar strengthens against other currencies, your returns may be reduced. Currency risk is like navigating a maze; you need to be aware of the twists and turns.

Political and Economic Instability

Political and economic instability in certain countries can negatively impact the performance of their stock markets. It’s important to stay informed about global events and assess the potential risks. Political and economic instability is like a storm at sea; it can be unpredictable and dangerous.

Higher Expense Ratios

International ETFs often have higher expense ratios than domestic ETFs. This is because they involve more complex trading and management. Be sure to factor in the expense ratio when evaluating the potential returns of an ETF. Expense ratios are like the fees you pay for a service; you need to make sure they’re reasonable.

Conclusion: A World of Investment Opportunities Awaits

The world of investing is constantly evolving, and the rise of international ETFs is a testament to that. By diversifying your portfolio beyond the S&P 500, you can tap into global growth opportunities and potentially enhance your returns. While there are risks to consider, the potential benefits of international diversification are undeniable. So, are you ready to explore the world of international ETFs and unlock a whole new world of investment opportunities?

FAQs About Investing in International ETFs

1. Are international ETFs riskier than domestic ETFs?
   

   Yes, international ETFs can be riskier due to factors like currency risk, political instability, and differing accounting standards. However, diversification can help mitigate these risks.

2. What percentage of my portfolio should I allocate to international ETFs?
   

   A common guideline is to match the global market capitalization weight, which is typically around 40-50%. However, your individual circumstances and risk tolerance should also be considered.

3. What are the tax implications of investing in international ETFs?
   

   International ETFs may generate dividends that are subject to foreign taxes. You may be able to claim a foreign tax credit on your US tax return to offset these taxes.

4. How do I choose the right international ETF?
   

   Consider factors like expense ratio, holdings, past performance, and the specific region or country you want to invest in. Read the ETF’s prospectus carefully.

5. Can I invest in international ETFs through my retirement account?
   

   Yes, most brokerage firms allow you to invest in international ETFs through your IRA or 401(k) account. Check with your provider to confirm.