How to Choose an International Stock Fund
Gregg Wolper explains the similarities to and differences from investing in U.S. stock funds.
Gregg Wolper: Choosing or analyzing an international stock fund is really pretty similar to choosing one for U.S. stocks. There's many similarities. You want a fund with a strategy that you understand and that you're comfortable with and that makes sense to you. There should be an experienced manager in charge with a team with long tenures, if possible. Of course, cost is very important. You might have to pay a little bit more for an international stock fund, but you don't have to pay that much more. Cost is still important as with any fund. And performance, of course, you want to see some good long-term performance.
But there are some differences. Currency exposure, that's the main difference. When an international stock fund buys foreign stocks, they do it in foreign currency. So, you'll have exposure to foreign-currency movements. Some funds hedge that currency exposure back into the dollar, most don't, or some do it partially. But that's OK to have exposure to foreign currencies. Probably most of your portfolio, and if you own a house, most of your assets are in U.S. dollars. So, there's nothing wrong with having some exposure to foreign currencies. It's just a good idea to keep that in mind. That it will affect returns positively, sometimes negatively at other times.
Another difference is emerging markets. You'll have to decide: Do you want to own a separate fund that invests in emerging markets, which can have better growth potential but also more volatility? Or do you just want your international stock manager to make that decision him or herself? Buy stocks in emerging markets when they think they're appealing, or to not own them when they're out of favor? You can also own a fund that doesn't have any exposure at all to emerging markets. Again, any of those choices is reasonable. Just decide what your own preference is--and to understand what you own. As always, that's the most important thing.
All in all, it's not that different, remember, from owning a U.S. stock fund, but just make sure you understand some of those differences and find a fund that you're comfortable with.