International stocks should be a part of every portfolio and a part of every investing strategy. Strong companies aren’t only found in the U.S., after all, with some of the biggest international stocks also being some of the biggest forces in America — companies like BP (NYSE:BP) and Toyota (NYSE:TM) immediately spring to mind.
What’s more, the slowly recovering economy has made it painfully clear that international stocks could be one of the few opportunities for growth in your current investing strategy. So-called BRIC emerging markets — that’s Brazil, Russia, India and China — still are growing even as corporations in the United States and Europe struggle. International stocks are a must-have right now, considering the poor performance of many domestic alternatives.
So how do you go about buying international stocks? What’s the best international investing strategy?
For most investors, there really are only two practical ways to buy into international stocks: ETFs and funds, ADRs on major U.S. exchanges:
International Stock ETFs and Mutual Funds
Whether you just want a diverse array of international stock investing options or whether you want to focus on a specific country or region, ETFs and mutual funds provide a powerful and low-risk way to explore these emerging markets.
Take the Matthews China Fund (MUTF:MCHFX). You give this fund manager your money, and he invests in China for you based on his experience and expertise. The manager might move quickly in and out of international stocks you’ve never heard of or trade stocks on a Hong Kong or Taiwan exchange. All you do is trust in his strategy and share in the profits (for a small fee, of course).
Exchange-traded funds, or ETFs, are quite similar — though they offer more flexibility in moving your money around since (as the name implies) they are traded on exchanges like regular stocks. You can buy and sell them at any point during market hours. Take the iShares MSCI Emerging Index Fund (NYSE:EEM), which has around $40 billion under management in international stocks. Its top holdings include companies in Russia, China and South America.
The biggest upside of these funds is that, aside from not messing around with international stocks on foreign exchanges, you also build diversification. You are buying a fund, after all, and not a single company — meaning you spread around your risk.
You always should research each mutual fund or ETF closely before investing, weighing its current holdings and expense ratio based on your personal goals. But generally speaking, most investors that want to invest in international stocks are best served with these funds that provide built-in diversification and rely on the expertise of an international stock expert to help your strategy succeed.
International Stocks Trading as ADRs
If you are a more sophisticated international investor and don’t mind doing your own research on stocks, you can pick from a host of individual companies via your normal brokerage account. While foreign exchanges in Germany, Japan and Asia often are not accessible, that doesn’t mean the international stocks there are out of reach. Simply look for American Depositary Receipts, or ADRs, listed on the major U.S. exchanges like the New York Stock Exchange and Nasdaq.
ADRs are almost a century old and are common ways to invest in the biggest international stocks. In a nutshell, an ADR is a stock that trades in the United States but represents a specified number of shares in a global corporation — kind of a stand-in for shares on an international stock exchange listed in a foreign currency. So instead of buying shares of Sony (NYSE:SNE) in Japan, denominated in yen, you can buy them right on the New York Stock Exchange in U.S. dollars.
What’s more, thanks to strict Securities and Exchange Commission regulations, these international stocks listed as ADRs must abide by the same strict regulations as the biggest blue chips in the S&P 500.
Why would a international company agree to have its stock appear in two places at once? Well, to give the company more exposure to U.S. capital. That makes it a win-win for both international stock investors and for the corporations themselves.
You must do your research, of course, like any other stock. But ADRs provide a great way to play international stocks if you have a specific pick in mind for your investing strategy.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.