Investing internationally is giving a lot of people heartburn. Trying to find low-cost international funds can make that heartburn worse.
That’s because the rules governing companies are different in different parts of the world. Reporting and auditing requirements are different. Cultures are different. Corporate cultures are different. Consumers are different. While domestic companies, reporting requirements and regulatory standards do a pretty good job of preventing fraud, we have certainly seen our share of stocks implode as a result of such fraud.
The risks increase however when you move overseas. None of this even mentions political risk. The risks of investing in a developing country are going to be very different from that of investing in companies based in the United Kingdom.
You cannot have a long-term diversified portfolio without some percentage of that portfolio invested internationally. It can be very difficult to analyze the fundamentals of a foreign company, so I generally suggest that people stick to mutual funds and exchange-traded funds when it comes to investing internationally.
That doesn’t mean you have to spend a lot of money in terms of management fees though. There’s enough competition out there that you should be able to get a high quality, low-cost international fund or two in your portfolio. Your three suggestions:
Best Low-Cost International Funds: Vanguard Total International Stock ETF (VXUS)
Best Low-Cost International Funds: Vanguard Total International Stock ETF (VXUS)
Vanguard Total International Stock ETF (NASDAQ:VXUS) is probably the simplest and most conservative choice as far as low-cost international funds go. As far as expense goes, the ETF has an expense ratio of only 0.11%. It also spreads its portfolio across several thousand stocks. The top five holdings alone only account for 4.4% of assets.
The ETF also largely avoids the most emerging of emerging markets, with only 1.4% in emerging European markets and 2.5% in Africa and Middle East markets. Otherwise, Europe developed markets account for 30% of the assets, the UK provides for 12% of the assets, and Japan takes up 18% of the fund’s assets.
The fund is also well diversified across the sector. It has 22% in financial services, which is a bit high for me but tolerable considering the importance financial services and fintech now hold around the world. I’d also like to see a little bit more real estate than the 4% the fund holds.
Best Low-Cost International Funds: Ivy Emerging Markets Equity C (IPOCX)
Ivy Emerging Markets Equity C (MUTF:IPOCX) offers an approach that is more heavily reliant on Asian developed and emerging markets, with – of Latin America and European emerging markets as well. Asian developed markets represent 23% of the portfolio. Asian emerging markets represent 47%. Latin America takes up 19%.
This is one of the few international funds I’ve found where the overall portfolio has a P/E ratio that is substantially below that of the US market. It currently stands at about 13. Yet long-term earnings growth is pegged at about 16%. So in some ways, you can look at this as an emerging market small-cap value fund.
Expense ratio this fund is 1.19%. That’s actually pretty reasonable compared to other funds based on its long-term performance. it has outperformed the MSCI ACWI Ex-USA benchmark over all time periods.
Best Low-Cost International Funds: T. Rowe Price International Discover (PRIDX)
T. Rowe Price International Discovery (MUTF:PRIDX) also supports an expense ratio of 1.19%, and you get some terrific management from this famous mutual fund family to boot. The fund focuses on both small and mid-cap companies and offers a very nice mix of developed to emerging markets (80%/20%). 47% of the portfolio is dedicated to Europe, 45% greater Asia and the rest in the Americas.
This makes a nice balance compared to the other two funds, both of which carried a 22% allocation to financials. In this case, the financial services allocation is 7%. 23% is allocated to consumer cyclicals, 20% technology, 14% to industrials, 12% healthcare and 9% basic materials. So you’re getting a much broader level of diversification with this fund.
The average PE is a little bit high, at 19.3, compared to long-term earnings growth of 15.2%. However, because we are looking at small and mid-cap growth stocks, I don’t consider this metric to be unreasonable.
The fund has a phenomenal success rate compared to the MSCI ACWI Ex-USA benchmark. For example, the average annual return over the past 15 years is 14.85%, compared to the benchmark of 9.22%. The numbers are even more impressive for the one-, three- and five-year range.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
