Diversification is a well-known strategy to help reduce investment risk. International stock markets account for about 44 percent of the world’s capitalization offering a broad range of investment opportunities outside of the U.S.1
Two common investment opportunities that exist outside of the United States include international mutual funds/ETFs and global mutual funds/ETFs. What’s the difference between the two?
Looking at each fund’s definition, advantages, and disadvantages, we’ll break down how international and global mutual 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 the ability to control the allocation of national and global stocks. In other words, international funds invest in the world, excluding the U.S.
This control enables investors in international funds to separate investments from U.S. investments, allowing for greater diversity of their overall investment portfolio. Global funds, as we'll see, provide no separation.
Global funds invest in global stock markets, including U.S.-based stocks. One advantage created by a global mutual fund is its ability to capitalize on the shifts in relative opportunities these markets may present at any given moment. In other words, global funds invest in the world, including the U.S.
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 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 overlap in domestic markets.
For example, an investor could have stock in a domestic company, like Clorox, then choose to invest in a global fund to access global markets. This fund may have already chosen to invest in Clorox as well. In turn, this exposes the investor to duplication (not diversity), which defeats one of the reasons for investing in a global mutual 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, mutual 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
The nuances of non-U.S. markets can be difficult for average investors to understand, let alone time-consuming. By using a mutual fund, you are entrusting your investment with a professional fund manager. These managers have the support and knowledge to properly understand these global markets, and mutual funds/ETFs often cost less when compared to direct investments.3
Whether an international mutual fund or a global mutual fund will work for you depends on your unique financial circumstances. Always consult with your financial advisor before making any investment decisions and be sure to understand the advantages and disadvantages of all your investments.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.