A woman is talking on her phone.
Investing strategies

Why invest internationally?

Give your money a passport to the overseas markets.
8 minute read

You may not be as familiar with the names of companies outside the United States, which might make you feel like the stocks and bonds they issue are risky. But if you invest in an international mutual fund or ETF (exchange-traded fund), you're increasing your portfolio's diversification by getting access to hundreds—sometimes thousands—of foreign securities.

Markets outside the United States don't always rise and fall at the same time as the domestic market, so owning pieces of both international and domestic securities can level out some of the volatility in your portfolio. This can spread out your portfolio's risk more than if you owned just domestic securities.

Stock

An investment that represents part ownership in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits.

Bond

A loan made to a corporation or government in exchange for regular interest payments. The bond issuer agrees to pay back the loan by a specific date. Bonds can be traded on the secondary market.

Mutual fund

A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.

ETF (exchange-traded fund)

A type of investment with characteristics of both mutual funds and individual stocks. ETFs are professionally managed and typically diversified, like mutual funds, but they can be bought and sold at any point during the trading day using straightforward or sophisticated strategies.

Market

The trading of a universe of investments, based on factors like supply and demand. For example, the "stock market" refers to the trading of stocks.

Volatility

The degree to which the value of an investment (or an entire market) fluctuates. The greater the volatility, the greater the difference between the investment's (or market's) high and low prices and the faster those fluctuations occur.

How much should be invested internationally?

In general, Vanguard recommends that at least 20% of your overall portfolio should be invested in international stocks and bonds. However, to get the full diversification benefits, consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds.

For most people, investing internationally through mutual funds or ETFs is the easiest option. Not only do you get the benefits of diversification, but investing through funds is also generally cheaper and easier since you don't have to worry about the costs and timing considerations involved in trading on international exchanges or through American depositary receipts.

American depositary receipts

A certificate issued by a U.S. bank that represents one or more shares in a foreign stock. American depositary receipts are denominated in U.S. dollars and traded on U.S. exchanges.

Things to consider

Investments in international markets are exposed to an additional source of volatility: currency fluctuations. This is especially true for international bonds. To dampen that volatility, consider international investments hedged in U.S. dollars. 

Types of international markets

International markets are generally divided into 2 categories:

  • Developed markets are located in countries that have established industries, widespread infrastructure, secure economies, and a relatively high standard of living.
    Examples of developed markets include the United Kingdom, Japan, Australia, Canada, and France.
  • Emerging markets are located in countries that have developing capital markets and less-stable economies. However, they're considered to be in the process of transitioning into developed markets, and they may be experiencing rapid growth. Currently, emerging markets make up about 15% to 20% of international markets in total.
    Examples of emerging markets include India, China, Egypt, South Africa, Mexico, and Russia.

Not surprisingly, developed markets are similar to the United States when it comes to volatility levels and the range of potential returns.

Emerging markets are more volatile than developed markets and have a wider range of potential outcomes. For that reason, we recommend that you don't overweight your allocation to emerging markets.

Returns

The profit you get from investing money. Over time, this profit is based mainly on the amount of risk associated with the investment. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return.

International regions

Many international funds invest across multiple markets within a specific area of the globe, like:

  • Asia-Pacific (Australia, Japan, Hong Kong, Singapore).
  • Europe (United Kingdom, France, Spain, Germany).
  • Latin America (Brazil, Mexico, Argentina, Peru).

How to choose an international investment

There are a few ways you can invest in foreign markets:

  • International funds invest only in foreign markets, excluding the United States.
  • Global or world funds provide exposure to both foreign and U.S. markets.
  • Regional funds invest primarily in a specific part of the world, like Europe or the Pacific region.
  • Developed markets funds focus on foreign countries with proven economies, like Japan, France, or the United Kingdom.
  • Emerging markets funds combine investments in countries that are considered to have "developing" economies, like India, Brazil, or China.

Get a list of:

Vanguard international stock funds

Vanguard international bond funds

Vanguard international stock ETFs

Vanguard international bond ETFs

Get broad exposure to international markets

You can use just a few funds to invest overseas. Each of these funds gives you access to a wide variety of international securities in a single, diversified fund or ETF.

*Source: Donald G. Bennyhoff and Francis M. Kinniry Jr., 2016. Vanguard Advisor's Alpha®. Valley Forge, Pa.: The Vanguard Group.

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

Investments in stocks and bonds issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. These risks are especially high in emerging markets.

You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules for full details. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

Investments in stocks and bonds issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. These risks are especially high in emerging markets.

For more information about Vanguard mutual funds and ETFs, visit Vanguard mutual fund prospectuses or Vanguard ETF prospectuses to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.