Diversification is a well-known strategy to help reduce the risk of investing. And with international stock markets accounting for about 44 percent of the world’s capitalization, a broad range of investment opportunities exist outside the borders of the U.S.1
Two common investment opportunities that exist outside of the United States include international funds and global funds. But what’s the difference between the two?
Looking at each fund’s definition, advantages and disadvantages, we’ll break down how international and global funds work to help you better understand your investment options.
International funds only invest in markets outside the United States. For investors, the biggest advantage an international fund provides is its ability to control the allocation of national and global stocks.
This control allows investors in international funds to separate investments in U.S. markets from investments in non-U.S. markets, giving greater control of their overall investment portfolio, as opposed to global funds which provide no separation.
Global funds invest in global stock markets without excluding U.S.-based stocks. One advantage created by a global fund is its ability to capitalize on the shifts in relative opportunities these markets may present at any given moment.
However, by consolidating into one fund, investors have reduced visibility and control over their overall portfolio’s separation between domestic and international stocks.
Advantages and Disadvantages
International funds and global funds each have some pros and cons that investors should be aware of.
Depending on how a global fund is managed, and whether an investor has other investments, there could be overlaps in domestic markets.
For example, an individual investor could have stock in a domestic company, then choose to invest in a global fund to access global markets. This fund may then choose to invest in the same stock the investor already owns. This, in turn, limits diversification, which may be one of the reasons for investing in a global fund in the first place.
Such an investor may opt for an international fund in place of a global fund to reduce the chance of overlap while still accessing international markets. With this in mind, it’s important to know that asset allocation is an approach to help manage investment risk and is not a guarantee against investment loss.
Investors should also be aware of their chosen fund’s approach to the inherent currency risks of international and global funds. Some funds choose to engage in strategies that may mitigate the effects of currency fluctuations, while others consider currency movements – up and down – to be an element of portfolio performance.
Also, it’s important to be aware that both global funds and international funds may face different taxes depending on the location of the fund. For example, funds located outside of the United States could be considered a Passive Foreign Investment Company, which processes taxes under a different set of rules, when compared to U.S.-based international or global funds.2
Active vs. Passive
The nuances of non-U.S. markets can be difficult for average investors to understand, let alone time-consuming. Depending on the area of the market you are investing in, you can choose from either an actively-managed mutual fund or a passively managed exchange-traded fund(ETF). Mutual funds will generally employ a fund manager to carry out the objectives of the fund, which usually involves a greater degree of due diligence and research, in addition to higher cost. Conversely, a passive ETF will rely on diversification, low cost, and historical market data to achieve the correct market exposure. Due to the complexity and lack of readily available data in some markets, a prudent and experienced mutual fund manager has the potential to outperform its passively-managed ETF counterpart. However, working closely with your Financial Planner to evaluate your portfolio is the best way to find which investment combination is best for you.
Evergreen Financial Group is a Fee-Only Financial Planning and Investment Firm located in Billings, MT serving clients in Montana, Wyoming and virtually across the country. Evergreen Financial Group specializes in working with Christian families, including Young Professionals, Current and Future Retirees and Church Staff Members.
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