For most people making their first international investment, mutual funds are the way to get started.
Below is a description of six types of mutual funds that many people use to add international exposure to their investment portfolio:
• International Mutual Funds: International funds hold foreign company securities only. No U.S.-based companies are included. Many investors select them to complement the U.S. securities (e.g., a Standard & Poor’s 500 index fund) that they hold, thereby increasing portfolio diversification.
• Global Mutual Funds: Global funds hold securities from companies worldwide. In other words, they include both foreign and U.S. company securities. A global fund’s prospectus will describe the relative proportion of domestic and overseas investments.
• Regional Mutual Funds: Regional funds invest in a specific area of the world such as the continents of Europe and Asia.
• Emerging Markets Mutual Funds: Emerging markets funds invest in companies of countries that are developing their economies through rapid industrial expansion, especially through manufacturing.
• Single-Country Mutual Funds: Single-country funds focus on just one foreign nation such as Russia or Japan.
• International Index Funds: International index funds track a benchmark of world stock markets. A commonly used index is the EAFE index which measures the performance of large company stocks worldwide. Funds that track the EAFE index often have the words “total international index fund” in their title. There are also regional index funds that track indices for specific regions or continents. Two advantages of international index funds are broad diversification and low expenses. International diversification is more apparent over longer time frames than during a short-term financial crisis when all stock markets worldwide are volatile. The more narrow a mutual fund’s focus (e.g., regional, emerging markets, and single-country funds versus global and international funds), the more volatile it tends to be (less diversification) and the more sensitive to currency fluctuations and political unrest.
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