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ETF Specialist

Low-cost diversified exposure to foreign developed markets

Foreign stock index funds are more diversified than ever.

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Foreign developed market indexes are less concentrated than they have been in decades. Japanese firms have dominated many of these benchmarks over the past 30-plus years. But an extended bout of relatively poor performance from these stocks has cut their standing to about 25% of foreign developed market indexes--down from roughly 60% in the early 1990s. So, low-fee developed market index-trackers are less dependent on a single market and currency, making funds like Schwab International Equity ETF SCHF a great way to get exposure to these established markets. SCHF earns a Morningstar Analyst Rating of Silver.

The fund’s target index, the FTSE Developed Ex U.S. Index, is composed of large- and mid-cap companies from 24 developed markets outside of the United States, including companies listed in Canada and South Korea. It weights its holdings by market cap, an approach that benefits investors by capturing the market’s consensus opinion of each stock’s value while mitigating turnover. Markets usually get long-term prices correct, but they occasionally make mistakes. Investors can drive valuations up if they get excited about a particular area of the market, and market-cap weighting will increase the fund’s exposure to it.

Daniel Sotiroff has a position in the following securities mentioned above: VEA. Find out about Morningstar’s editorial policies.

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