ETFs That Take Some of the Volatility Out of Foreign Stocks
Currency-hedging and low-volatility approaches might make it easier to stick with international stocks over the long haul.
Low-cost, market-cap-weighted index funds can serve as the foundation of a strong portfolio. They effectively represent the collective views of all investors in a given market and should serve as a default for those who don't have an alternative opinion to express. Vanguard Total Stock Market ETF (VTI) (which charges a fee of 0.05%), Vanguard FTSE Developed Markets ETF (VEA) (0.09%), and Vanguard FTSE Emerging Markets ETF (VWO) (0.15%) are among the cheapest options for broad market-cap-weighted exposure to U.S., foreign developed-markets, and emerging-markets stocks, respectively. These three exchange-traded funds cover the full market-cap spectrum of their target markets and could form the nucleus of an equity portfolio. Foreign stocks tend to be riskier than their U.S. counterparts because they expose investors to greater currency risk. However, they should carry a significant weighting in a well-diversified portfolio.
Using the composition of the FTSE Global All Cap Index at the end of July 2016 as a point of reference, U.S. stocks represent 53% of the world's investable market capitalization. The corresponding figures for foreign developed-markets and emerging-markets stocks are 39% and 7%, respectively. Those who want to maintain a neutral regional allocation could use a fund like Vanguard Total World Stock ETF (VT). But there are some advantages to retaining control over regional allocations rather than letting them fluctuate with market prices. This approach allows investors to maintain a more consistent level of portfolio risk (as stocks in each region have different risk characteristics) and rebalance opportunistically to take advantage of attractive valuations.
Alex Bryan has a position in the following securities mentioned above: EFAV, EEMV. Find out about Morningstar’s editorial policies.