What Are the Benefits of International Portfolio Diversification?

International stocks bring some different aspects to an investment portfolio that cannot be matched by U.S. stocks alone.

Types

International stock markets can be classified into two broad categories: developed markets, such as the United Kingdom and Japan, and emerging markets, such as China and India.

Growth

Emerging market countries have the ability to generate economic growth at rates much higher than developed markets. The U.S. economy is happy to grow at 3 percent in a year whereas China and India can generate growth rates of more than 10 percent in good years.

Cycles

Different economies rise and fall on different cycles. For example, Japan may be having trouble while neighbor South Korea could be doing well.

Currency

U.S. investors holding foreign stocks can benefit if the dollar weakens or the foreign currency strengthens. Growing economies tend to have strengthening currencies, giving U.S. investors a double benefit of holding international stocks.

Effects

Brazil, an emerging market, was one of the best-performing stock markets from 2004 to 2009. The U.S. market, as tracked by the S&P 500, lost 5.6 percent per year from 2006 to 2009, and returned less than 1 percent from 2004 to 2009.

Identification

International portfolio diversification is relatively simple using exchange-traded funds (ETFs). The largest developed market fund is the iShares MSCI EAFE Fund, and the biggest emerging market fund is iShares MSCI Emerging Markets.

References

• Benefits of International Portfolio Diversification
• Center for the Study of Emerging Markets