An introduction to foreign ETFs

What is a foreign ETF?

A foreign ETF is any ETF that is focused on providing exposure to foreign securities. This may include an ETF that tracks global markets, specific countries, and specific asset classes. These ETFs allow investors to gain exposure to foreign assets such as emerging markets stocks and bonds.

Foreign ETFs may be passively or actively managed depending on the fund mandate and portfolio manager. Passively managed foreign ETFs will track an index, while active managers may attempt to outperform an index.

It is important to note that foreign ETFs generally have a higher management expense than U.S. ETFs due to the increased costs of investing abroad such as dealing with foreign currency translation, transaction costs, and less liquidity in foreign securities.

Foreign ETFs may have different focuses, such as exposure to different countries or geographies, different factors, and different asset classes.

Why invest in foreign ETFs?

Foreign ETFs, and foreign investments, in general, have a few overarching benefits to investors who have typically only focused on U.S. securities. The benefits are as follows:

1.     Greater Diversification: investors in foreign ETFs are able to diversify their geographical and political risk beyond the U.S. and North American markets. This can help to lower volatility, as well as enhance overall returns.

2.     Exposure to Growth Markets: investors in foreign ETFs are able to gain exposure to markets and countries with higher overall growth than the U.S. Given that the U.S. is a developed market, its economic growth is fairly limited compared to some emerging markets where there are more substantial growth opportunities.

3.     More Opportunities: when limiting the investable universe to only U.S. securities, there are fewer opportunities to express market views and expectations. However, investors in foreign ETFs have more opportunities to take advantage of their market views.

In addition to the benefits of investing in foreign securities, there are also some general benefits that come with investing in ETFs. One of the main advantages of foreign ETFs is that they can be hedged and denominated in a local currency, therefore removing the risk of foreign exchange fluctuations.

Furthermore, ETFs provide benefits of greater transparency of invested securities, lower costs, and greater liquidity than picking individual foreign securities.

Foreign ETFs: Examples

There are many foreign ETFs across different geographies, asset classes etc. However, some examples of highly liquid foreign ETFs are:

VXUS (Vanguard Total International Stock ETF)

• AUM: $46.1B
• Expense Ratio: 0.08%
• YTD performance: -18.3%

BNDX (Vanguard Total International Bond ETF)

• AUM: $44.6B
• Expense Ratio: 0.08%
• YTD performance: -9.3%

HEDJ (WisdomTree Europe Hedged Equity Fund)

• AUM: $1.4B
• Expense Ratio: 0.58%
• YTD performance: -14.8%

AAXJ (iShares MSCI All Country Asia ex Japan ETF)

• AUM: $3.6B
• Expense Ratio: 0.69%
• YTD performance: -15.8%

Data for this article is as of July 11th, 2022.