Retirees are often on the hunt for income, and foreign stocks and bonds tantalize by offering yields that are often higher than comparable payouts available on the home front. For example, Vanguard High Dividend Yield ETF (VYM), which is focused on high-yielding U.S. stocks, has yielded about 3.1% over the past year, whereas its foreign-stock counterpart (VYMI) yielded about 3.25% over that same period. Foreign bonds from developed markets yield less than U.S. bonds today, but emerging-markets bonds, especially those denominated in local currencies, offer positively robust yields of 5% or 6%.
Yet securities denominated in foreign currencies can add an element of uncertainty to a portfolio, and most pre-retirees and retirees are looking for more certainty, not less. When foreign currencies gain in value relative to the dollar, investors who own foreign-currency-denominated stocks and bonds win. That has been the case for the past few years. But the opposite can also occur: If foreign currencies slide relative to the dollar, investors would have been better keeping all of their assets in dollar-denominated securities. That was the case from early 2014 through early 2017: The dollar soared, prompting a spate of launches of foreign-stock exchange-traded funds that hedge their equity allocations into the dollar.
Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.