International Mutual Funds
An even easier way to invest internationally is through mutual
funds that specialize in foreign investments. Investors invest in
international mutual funds in the same way as they choose domestic
stock and bond funds. International mutual funds invest in the
stocks of foreign countries.
Some funds invest in a mixture of countries, including U.S.
companies. Depending on their mix of foreign holdings, mutual
funds may be classified as follows: international, global, regional,
International funds invest in the securities of companies whose
stocks trade on foreign exchanges. Global funds, as the name
implies, invest in securities around the world, including those of
U.S. companies. Regional funds specialize in the securities of companies
located in a specified geographic area of the world. For
example, there are funds that specialize in the Pacific Rim area,
Latin America, Europe, and the emerging economies. Many of these
may be closed-end funds that trade on the exchanges as opposed
to the open-end mutual funds that are bought and sold through
investment companies or through brokers in the case of load funds.
Only country funds invest in the securities of a specified country.
Some examples include Japan funds, Spain funds, Portugal funds,
Switzerland funds, Chile funds, and India funds. As with regional
funds, there are open-end and closed-end funds.
Open-end mutual funds and closed-end funds are discussed
in detail in Chapters 14 and 15, respectively. Investors should be
aware of the nuances, risks, advantages, and disadvantages of
these types of funds before they invest.
One of the advantages of choosing international mutual funds
over investing in individual foreign stocks is that with a mutual
fund, the investor owns a part of a broadly diversified portfolio. To
obtain such diversification with individual stocks, investors would
need larger amounts of money. International funds are more diversified
than sector and country funds. However, when the markets
of sector and country funds are “hot,” they can easily outperform
the more broadly diversified international funds. The converse is
true when these markets slump.
The results of international, global, regional, and country
funds depend on their holdings in the funds. If, for example, the
bulk of an international fund’s holdings are concentrated in
European countries, that fund may not experience the benefits of
the worldwide growth of the Pacific Rim and Latin America.
European economies are somewhat connected and may have similar
economic cycles. Many international and global funds concentrate
on certain sectors of the globe and are not broadly diversified.
Investors should read the fund’s prospectus with a list of the
fund’s country holdings before investing. By identifying the mix of
stocks in the different countries, an investor can allocate investments
on a geographic basis. For example, an investor who wants
a broadly diversified portfolio might have to invest in two different
international mutual funds to get this broad diversification.
Investing in international mutual funds is advantageous for
investors who do not have the time or the inclination to research
individual foreign stocks. The portfolio managers of these funds
select the foreign stocks after researching the companies and economic
climates of the countries.
Another advantage of investing in international mutual funds
over individual foreign stocks is that portfolio managers of international
funds may be able to reduce the risks of unfavorable currency
fluctuations by using hedging strategies. These involve the
use of foreign currency options and futures contracts.
Not all the international funds use these strategies, and some
use them only on an occasional basis. The objective of international
investing is not only to invest solely in foreign stocks that increase
in price but also to take advantage of the devaluation of the dollar
relative to these currencies. For long-term investors in foreign
stocks and/or funds, the currency effects tend to even out over
longer periods of time.
Investors need to be aware of the objectives of the funds, the
stated returns, the risks, and the fees charged. Invest in funds with
low expense ratios.
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