Mutual funds. One way to invest internationally is through mutual funds. There are different kinds of funds that invest in foreign stocks.
Global funds invest primarily in foreign companies, but may also invest in U.S. companies.
International funds generally limit their investments to companies outside the United States.
Regional or country funds invest principally in companies located in a particular geographical region (such as Europe or Latin America) or in a single country. Some funds invest only in emerging markets, while others concentrate on more developed markets.
International index funds try to track the results of a particular foreign market index. Index funds differ from actively managed funds, whose managers pick stocks based on research about the companies.
International investing through mutual funds can reduce some of the risks mentioned earlier. Mutual funds provide more diversification than most investors could achieve on their own. The fund manager also should be familiar with international investing and have the resources to research foreign companies. The fund will handle currency conversions and pay any foreign taxes, and is likely to understand the different operations of foreign markets.
Like other international investments, mutual funds that invest internationally probably will have higher costs than funds that invest only in U.S. stocks. If you want to learn more about investing in mutual funds, information is available in our brochure, Invest Wisely – An Introduction to Mutual Funds.
Exchange-Traded Funds. An exchange-traded fund is a type of investment company whose investment objective is to achieve the same return as a particular market index. Increasingly popular with investors, ETFs are listed on stock exchanges and, like stocks (and in contrast to mutual funds), trade throughout the trading day. A share in an ETF that tracks an international index gives an exposure to the performance of the underlying stock or bond portfolio along with the ability to trade that share like any other security.
American Depositary Receipts. The stocks of most foreign companies that trade in the U.S. markets are traded as American Depositary Receipts (ADRs) issued by U.S. depositary banks.
Investor Tidbit: ADRs or ADSs? Sometimes the terms “ADR” and “ADS” (American Depositary Share) are used interchangeably. An ADR is actually the negotiable physical certificate that evidences ADSs (in much the same way a stock certificate evidences shares of stock), and an ADS is the security that represents an ownership interest in deposited securities (in much the same way a share of stock represents an ownership interest in the corporation). ADRs are the instruments actually traded in the market.
Each ADR represents one or more shares of a foreign stock or a fraction of a share. If you own an ADR you have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR. The price of an ADR corresponds to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares.
Owning ADRs has some advantages compared to owning foreign shares directly:
When you buy and sell ADRs you are trading in the U.S. market. Your trade will clear and settle in U.S. dollars.
The depositary bank will convert any dividends or other cash payments into U.S. dollars before sending them to you.
The depositary bank may arrange to vote your shares for you as you instruct.
On the other hand, there are some disadvantages:
It may take a long time for you to receive information from the company because it must pass through an extra pair of hands. You may receive information about shareholder meetings only a few days before the meeting, well past the time when you could vote your shares.
Depositary banks charge fees for their services and will deduct these fees from the dividends and other distributions on your shares. The depositary bank also will incur expenses, such as for converting foreign currency into U.S. dollars, and usually will pass those expenses on to you.
U.S. Traded Foreign Stocks.
Although most foreign stocks trade in the U.S. markets as ADRs, some foreign stocks trade here in the same form as in their local market. For example, Canadian stocks trade in the same form in the United States as they do in the Canadian markets, rather than as ADRs. You can purchase ADRs and other foreign stocks that trade in the United States through your broker. There are different trading markets in the United States, and the information available about an ADR or foreign stock will depend on where it trades.
Stocks Trading on Foreign Markets.
If you want to buy or sell stock in a company that only trades on a foreign stock market, your broker may be able to process your order for you. These foreign companies do not file reports with the SEC, however, so you will need to do additional research to get the information you need to make an investment decision. Always make sure any broker you deal with is registered with the SEC. It is against the law for unregistered foreign brokers to call you and solicit your investment.
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