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By Michael Rawson, CFA | 11-23-2011 12:00 AM

Investing Internationally With ETFs

Whether you are looking for core foreign exposure or making a tactical bet, ETFs can be a good choice for international-stock investors, says Morningstar's Patty Oey.

Mike Rawson: International equities can be a great way to diversify a portfolio, and exchange-traded funds can be a great way to obtain that exposure because of their low cost. Additionally, ETFs are generally diversified. However, there are more than 200 international ETFs to choose from, so coming through that investment landscape can be quite daunting. I'm Mike Rawson with Morningstar. Joining me today is Patty Oey, ETF analyst with Morningstar. Patty, thanks for joining me.

Patricia Oey: Thanks for having me.

Rawson: Patty, there are a lot of issues to think about when you go international, when you're invest in ETF's. What are some of the things that come to mind? How should investors be using international equity ETFs?

Oey: Well, for core exposure we definitely like some of these very simple, plain-vanilla market-cap-weighted index funds. Examples of these are iShares and Vanguard. They both have ETFs that track the MSCI EAFE Index, that's a developed-market equities index and the MSCI Emerging Markets Index.

We also like ETFs that track maybe what can be considered a strategy index or a quantitative index. WisdomTree has a suite of dividend-weighted ETFs, and we like these ETFs because we feel that dividends can be kind of an indicator of quality and dividend funds also tend to have a value tilt. And this is important for long-term investors as the value premium has also been observed in international equities. So, the WisdomTree funds we like. There is one for emerging markets, the ticker is DEM and one for developed equities, the ticker is DWM. Both of these funds have exhibited higher returns and lower volatility relative to their comparable MSCI indexes.

Rawson: So, Patty, you've talked about using market-cap and value-titled indexes that are broadly diversified as core parts of your portfolio. What about single-country ETFs?

Oey: Well, single-country ETFs are very useful for tactical investing and also for customizing a portfolio. We don't recommend them as core holdings. One thing that we should note is that with international markets, even developed markets, their capital markets are not as robust as the U.S. So, with some of these market-cap-weighted, single-country funds, they can be very top-heavy or they can have very outsized sector exposures. But otherwise you can kind of look at them as U.S. sector funds. It's a way to do tactical investing and to customize your portfolio.

Rawson: So, the broadly diversified ETFs can be used as core holdings. Single-country funds are generally a little bit more tactical and perhaps speculative?

Oey: Yes.

Rawson: Now, moving on, some investors are concerned when they invest in international ETFs because they notice that these ETFs can trade at premiums and discount intraday and that premium or discount can fluctuate quite a bit. Is this something an investors should be concerned about?

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