Learn about international investing
24 October 2018 | Investing
With about 97%1 of the world's stock market value in the hands of companies that trade on non-Canada exchanges, international stocks offer a significant opportunity to diversify your portfolio.
The benefits of diversification
International investing can help smooth the ups and downs of a portfolio that is concentrated in the Canada stock market. This is because Canada stocks and international stocks have not historically moved in lock-step. As long as international and Canada stocks are less than perfectly correlated, investors can benefit from the reduced volatility that international diversification provides.
While Canada has generally experienced less return volatility than most other developed countries since 1970, a broad global index realized the lowest average volatility—a good argument for broad international diversification.
A closer look at international markets
International markets can be divided into four geographic categories:
Americas includes Canada, United States, Brazil and the other countries in the Western Hemisphere.
Asia/Pacific encompasses a broad swath of the Pacific and Far East, including Australia, China and Japan.
Europe includes all the countries in Europe.
Africa/Middle East comprises countries such as Egypt, Israel and South Africa.
International markets are also grouped by their level of development:
Developed markets are fully modern industrial nations with well-established stock markets, such as Western European countries, Canada, the United States and Japan.
Emerging markets are nations generally evolving from agricultural to industrial economies or from government-controlled economies to a free market. Mexico, Brazil, Russia and China are emerging markets.
Frontier markets include countries that fall outside of traditional equity indexes. In contrast to developed and emerging markets, frontier markets typically include countries in need of significant improvement in areas such as market liquidity, infrastructure and political stability. Nigeria, Bulgaria and Vietnam are frontier markets.
The risks of international investing
Risk and reward are simple facts of investing. However, with international investing, you need to know about some additional risks.
Currency risk. Foreign companies trade and pay dividends in the currency of their local markets. When Canada-based investors receive those dividends or sell the investment, the cash they receive must be converted into Canadian dollars. If the Canadian dollar strengthens against the foreign currency, that currency will buy fewer dollars, and the return will be lower. If the foreign currency is strong compared with the Canadian dollar, the return would be higher.
Country risk. Political upheaval can disrupt nations' economies and markets. Sudden changes in a country's economic, regulatory or trade policies can also cause its stock market to soar or plummet.
Liquidity risk. Foreign companies are not subject to the same accounting, auditing and financial-reporting standards and practices as Canadian companies, and their stocks may not be as liquid as those of similar Canadian firms.
Other considerations of international investing include the possibility of higher trading costs and foreign withholding taxes.
International investing is a bit like international travel—the experience can be rewarding, though it's not without risk and uncertainty. Work with your financial advisor to establish an international investing plan that's right for you.
1 Sources: Vanguard calculations using data from FTSE, as of December 31, 2016.
This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and thus, should not be used as the basis of any specific investment recommendation. Investors should consult a financial and/or tax advisor for financial and/or tax information applicable to their specific situation.
All investments, including those that seek to track indexes, are subject to risk, including the possible loss of principal. Diversification does not ensure a profit All investments, including those that seek to track indexes, are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While ETFs are designed to be as diversified as the original indexes they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment.