International and Emerging Market Investing: Accessing Global Markets

For decades, U.S. investors could build portfolios almost entirely around domestic companies. Today, that approach can leave out a large portion of the global economy.

International investing gives investors access to companies, industries, and economies outside the United States. That exposure can include established markets such as Japan, Germany, the United Kingdom, Canada, and Australia, as well as emerging markets with developing financial systems and economies.

The appeal is straightforward: companies outside the United States can provide different sources of revenue, economic exposure, and growth. But international investing also introduces risks that may be less familiar to someone who has only owned U.S. securities.

Currency movements, foreign tax rules, political developments, different accounting standards, lower liquidity, and market structures can all affect returns. Emerging markets can add another layer of volatility and regulatory uncertainty.

For investors considering global exposure, the objective is not simply to buy something outside the United States. It is to understand what additional risks and opportunities that exposure brings to the portfolio.

Why Investors Look Beyond the U.S.

International investments can serve several purposes within a portfolio.

One is diversification. Foreign markets do not always move in exactly the same way as U.S. markets, although global economies have become increasingly interconnected.

Another is access to businesses that may have limited or no equivalent in the U.S. market. International markets include major pharmaceutical companies, semiconductor manufacturers, financial institutions, automobile companies, consumer brands, energy producers, industrial businesses, and technology firms.

Emerging markets can provide exposure to economies with different demographic trends, infrastructure development, consumer growth, and levels of economic development.

The SEC identifies diversification and potential growth as two reasons investors may consider international investments, while also emphasizing the additional risks involved.

That potential comes with uncertainty. A growing economy does not guarantee that investors in its stock market will receive strong returns, because valuations, corporate governance, currency movements, and other factors influence security prices.

Developed Markets and Emerging Markets Are Not the Same

"International" is a broad category.

Developed markets generally have established financial systems, mature companies, deeper capital markets, and more developed regulatory frameworks.

Emerging markets are economies whose financial markets and economic systems are still developing relative to established developed markets.

The distinction is not permanent. Countries can move between classifications as their economies, markets, regulations, and accessibility change.

Emerging markets can offer exposure to faster-growing economies and expanding consumer populations, but they can also experience greater volatility, political uncertainty, currency fluctuations, and liquidity constraints.

FINRA notes that emerging and frontier markets can involve elevated political, regulatory, legal, liquidity, and currency risks compared with more developed markets.

This means a broad international fund and an emerging-market fund can behave very differently even though both invest outside the United States.

International ETFs Make Global Exposure Easier

For many individual investors, exchange-traded funds are one of the simplest ways to obtain international exposure.

An international ETF can hold a portfolio of companies from multiple countries, allowing investors to purchase one security rather than researching and buying dozens of foreign stocks individually.

Funds can be structured around different objectives.

Some track developed international markets. Others focus on emerging markets, a particular region, individual countries, or specific industries.

A broad international ETF may provide exposure to hundreds or thousands of companies, depending on its methodology.

That diversification can reduce the impact of one company experiencing financial problems, although it does not eliminate market-wide or country-level risks.

Investors should examine an ETF's prospectus, holdings, geographic allocation, expense ratio, index methodology, and historical premiums or discounts before investing. ETFs trade throughout the day and can trade at prices above or below their net asset value.

American Depositary Receipts Provide Another Route

Investors who want exposure to a particular foreign company may encounter American Depositary Receipts, or ADRs.

An ADR represents an interest in shares of a non-U.S. company held through a U.S. depositary bank. ADRs can trade in U.S. markets in U.S. dollars, making them more accessible to investors who do not want to trade directly on a foreign exchange.

ADRs can be useful when an investor wants exposure to a specific company rather than an entire international market.

However, the underlying business remains subject to the economic, legal, accounting, and regulatory environment of its home country.

Investors should also check whether an ADR carries depositary fees and understand how dividends, corporate actions, and currency movements affect the investment.

Currency Can Change the Result

Currency risk is one of the easiest aspects of international investing to overlook.

Suppose a U.S. investor owns shares of a European company. The company's stock could rise when measured in euros, but the investor's return in U.S. dollars could be smaller if the euro weakens against the dollar during the same period.

The reverse can also happen.

Currency movements can therefore increase or reduce investment returns independently of the underlying company's stock performance.

Some international funds hedge currency exposure while others leave it largely unhedged. Investors should check the fund's strategy rather than assuming that international exposure always creates the same currency risk.

The SEC specifically identifies exchange-rate changes and foreign currency controls as risks that can affect international investments.

Foreign Taxes Can Affect Investment Income

International investments can introduce tax considerations that do not arise in exactly the same way with domestic securities.

For example, dividends paid by foreign companies may be subject to withholding taxes in the country where the company is based.

The treatment can vary depending on the country, investment structure, tax treaty, account type, and investor's circumstances.

International mutual funds and ETFs can also have expenses associated with investing in foreign markets.

Investors using taxable brokerage accounts should understand how foreign taxes and potential foreign tax credits may affect the after-tax return.

Retirement accounts can have different tax characteristics, so the same international investment may have a different practical tax profile depending on where it is held.

Emerging Markets Bring Additional Uncertainty

Emerging-market investing can provide exposure to economies undergoing significant structural changes.

Economic expansion, urbanization, infrastructure investment, rising consumer spending, and expanding financial services can create opportunities for businesses operating in these markets.

At the same time, emerging economies can be more sensitive to external shocks.

A sharp change in global interest rates, commodity prices, capital flows, exchange rates, or geopolitical conditions can affect an emerging-market economy quickly.

Government policies can also have a larger impact on individual industries or companies in some jurisdictions.

This does not mean every emerging market is inherently unstable. Conditions vary substantially between countries.

It does mean investors should examine the specific country and sector rather than treating "emerging markets" as one uniform investment category.

Accounting and Disclosure Can Differ

Researching an international company can require more work than researching a U.S. company.

Foreign companies may follow accounting and reporting requirements that differ from U.S. standards. Disclosure frequency and the amount of information available to investors can also vary.

Information may not always be available in English, and investors may have less familiarity with local regulators, corporate governance standards, or shareholder protections.

The SEC notes that international investors may encounter differences in financial reporting, auditing, disclosure, and the availability of company information.

This is one reason diversified funds can be useful for investors who want international exposure without conducting detailed research on individual foreign companies.

Political and Regulatory Risk

International markets operate within different legal and political systems.

Changes in government policy, trade restrictions, taxation, capital controls, foreign-ownership rules, or financial regulations can affect companies and investors.

A government decision affecting an industry can sometimes have a significant impact on a country's stock market or a particular group of companies.

Political risk does not necessarily mean that an investment will lose money. It means that investors need to account for factors that may be less predictable or less familiar than those affecting domestic investments.

The legal protections available to shareholders can also vary between jurisdictions.

Liquidity Matters

Some international markets have considerably lower trading volumes than major U.S. exchanges.

Lower liquidity can create wider bid-ask spreads and make it more difficult to buy or sell securities at the desired price.

Market hours can also differ from those in the United States.

Country-specific restrictions may limit the ability of foreign investors to purchase certain securities or move money across borders.

These issues can become particularly important during periods of market stress, when liquidity can deteriorate rapidly.

The SEC identifies differences in trading volume, market hours, foreign-investor restrictions, and legal remedies as considerations for international investors.

International Diversification Does Not Mean Buying Everything

Adding international investments does not automatically make a portfolio diversified.

An investor could own several international ETFs that hold many of the same companies.

For example, a broad developed-market fund, a Europe-focused ETF, and a global fund may have substantial overlap.

The same issue can occur with emerging-market funds.

Before adding another investment, investors can review the actual country and company exposures already present in their portfolio.

This is particularly important when international holdings are combined with U.S. multinational companies. A U.S.-listed company may already generate substantial revenue overseas, meaning a domestic portfolio can contain more international economic exposure than its labels suggest.

How Much International Exposure Makes Sense?

There is no universal percentage that applies to every investor.

The appropriate allocation depends on the investor's goals, time horizon, existing portfolio, risk tolerance, tax situation, and willingness to accept currency and international-market risk.

Some investors may prefer broad global funds that include both U.S. and international companies. Others may maintain separate domestic, developed-market, and emerging-market allocations.

The important point is to understand what each approach actually owns.

A global fund can provide a different geographic mix from a fund that excludes U.S. stocks. An international fund may focus exclusively on companies outside the United States. An emerging-market fund may be much more concentrated in developing economies.

Reading the fund's mandate and holdings can prevent unexpected exposure.

Evaluating an International Fund

Before purchasing an international ETF or mutual fund, investors can review several practical factors:

Geographic exposure: Which countries account for most of the portfolio?

Market classification: Does the fund invest in developed markets, emerging markets, or both?

Sector exposure: Is the portfolio heavily concentrated in technology, financials, energy, or another industry?

Expense ratio: How much does the fund charge annually?

Currency strategy: Is foreign-currency exposure hedged or unhedged?

Index methodology: How are companies selected and weighted?

Holdings: Which companies represent the largest positions?

Liquidity: How actively do the fund's shares trade?

Tax considerations: How are dividends and foreign taxes handled?

These details can reveal meaningful differences between funds that appear similar from their names alone.

Direct Foreign Stocks vs. Diversified Funds

Buying individual foreign stocks can provide more control but also requires considerably more research.

Investors need to understand the company's financial statements, local market, currency, regulations, shareholder protections, and industry environment.

A diversified international fund spreads that research burden across a portfolio managed or structured around a defined investment strategy.

The trade-off is that investors give up control over individual holdings and accept the fund's expense ratio and methodology.

For investors without the time or expertise to analyze individual foreign companies, diversified funds can provide a more practical way to obtain international exposure.

A Global Portfolio Requires More Than Country Selection

International investing is sometimes presented as a simple search for the next fast-growing economy.

In reality, the investment decision is more complicated.

Economic growth does not necessarily translate into attractive stock returns. A country's GDP can grow rapidly while investors receive disappointing returns because valuations were already high, companies captured only part of the growth, or the currency weakened.

Likewise, a country experiencing economic difficulties can still contain individual companies with strong competitive positions.

This is why investors should distinguish between economic growth, corporate profitability, stock-market valuations, and investment returns.

The Role of International Markets in a Long-Term Portfolio

International and emerging-market investments can broaden the range of companies and economies available to an investor.

They can provide exposure to industries and consumer markets that may behave differently from those in the United States, while emerging markets can provide access to economies undergoing structural development.

But the additional opportunity comes with additional complexity.

Currency movements, foreign taxes, different disclosure requirements, political and regulatory changes, lower liquidity, and market volatility all need to be considered.

For many investors, diversified ETFs or mutual funds can provide a practical way to access international markets without selecting individual foreign securities.

The key is understanding exactly what is inside the investment, how much it costs, what countries and sectors it covers, and how its risks interact with the rest of the portfolio.

International investing works best as part of a broader portfolio decision rather than as a standalone bet on a particular country or economic trend. A carefully reviewed global allocation can give investors access to a much wider investment universe while keeping the focus on diversification, costs, risk, and long-term financial objectives.