Nowadays, it has become easy for private investors to invest money worldwide. This is made possible by the very broad range of ETFs on the global stock markets. In this way, when you invest in ETF, you can invest your money not only in different countries and regions, but also in certain stock indices.
Still, most private investors still tend to invest in their own country - the threshold and the respect for international investment is still high. However, if you want to try your luck, you should either have a savvy and experienced fund manager on your side, or scrupulously inform yourself and be smart enough to find the best ETFs for your investment strategy.
In this post we would like to give you an overview of the topic and introduce you to different ETFs.
Investing Overseas is no longer so expensive
In the past, international investment was quite expensive and also quite complication - but fortunately that has changed. This is mainly due to the rapid development of Exchange Traded Funds (ETFs), which allow easy and inexpensive investment in all major stock markets and many smaller countries as they are passive index funds.
Another big advantage of the ETFs is that they are a low-risk investment. Of course, this is especially true when compared to investing in a single foreign stock. Investing in a stock index fund which invest in many companies, more specifically in as many as the index shown.
Overview of different ETFs
Here, we would like to give you an overview of different country-specific ETFs. To take this into account, is advantageous for several reasons:
- Government change or economic recovery of the country in question, usually positively affects the stock market and can make a good profit.
- Some investors have a gambling nature and they sort of place "Bid", such as when they bid on a particular commodity index. In this case, so to speak, they relied on rising commodity prices.
- And then, of course, there's all the current portfolio diversification that ETFs can do well. Not only diversify through different stocks, but even through investment in different countries / regions or areas. However, the alternative of benchmark indices on a country-by-country basis is cheaper than regional or global ETFs, although of course much broader.
The following table summarizes the main markets for ETFs and it is easy to see that the expense ratio is very favourable.
Main markets with the cheapest Stock ETFs
||Number of titles
||Best cost ratio per year
By combining these low-cost ETFs, you can put together a very well-diversified portfolio - at a very low cost.
Brief Summary of Index ETFs
In principle, the same applies to country-specific ETFs as to all other ETFs - you should choose an index that best suits your needs and your individual starting situation. As a rule, one finds a specialized and a broader index for each country.
The main difference of the indices lies in the number of participations and the size of the companies. The weight of the companies is usually based on criteria such as dividend yield, the price-earnings ratio, etc.
A good example is the United States, where you can invest in one side of the S&P 500 and on the other side in the S&P High Yield Dividend Aristocrat Index. The latter has a higher dividend yield compared to the S&P 500.
In general, one can choose between ETFs on the MSCI Index and the respective index. The latter are usually slightly cheaper, while the MSCI Index has a wider spread.
For the fixed income securities, there are various different names, but usually mean the same type of security. Bonds ETFs are also referred to as bonds. These bonds are issued by governments, banks or other companies to raise capital from investors.
Bonds usually have a fixed maturity, which is between one and up to 30 years. The investor gets the right to the repayment plus the receipt of profit in form of interest.
Bonds are sensitive to changes in interest rates, and these changes have a stronger impact on longer-dated bonds. Therefore, bond categories are ranked in different maturities:
- Short-term investment of 1 to 3 years with less sensitivity to changes in interest rates, e.g. iShares € Govt Bond 1-3yr UCITS ETF EUR (Acc).
- In the middle category you will find e.g. iShares 3-7 Year Treasury Bond ETF.
- This is followed by the long-term category (7-10 years), for example, where you will meet iShares 7-10 Year Treasury Bond ETF.
- And finally very long-term bonds like the TLT iShares 20+ Year Treasury Bond ETF.
Corporate Bonds ETFs invest in debt securities of investment grade companies. Bonds included in this fund have different maturities and are issued by companies in different sectors.
The iShares USD Ultrashort Bond UCITS ET-DIS Index Fund (WKN: A1W374) tracks the performance of the Markit iBoxx USD Liquid Investment Grade Ultrashort Index.
The ETF invests directly in the securities included in the index - it is a physical replicating ETF. The Index includes fixed income and variable rate securities with a residual maturity of 0 to 1 year.
Various providers in this category are:
AdvisorShares, American Century Investments, Amplify, Calvert Research and Management, Deutsche Asset Management, Fidelity, FlexShares, Franklin Templeton Investments, Goldman Sachs, Guggenheim, Hartford Funds, IndexIQ, In.
Government bonds ETFs allow investors to invest in fixed income securities issued by government agencies. These ETFs include US Treasuries with various maturities, floating rate government bonds and TIPS.
The iShares $ Treasury Bond 1-3YR UCITS ETF - USD DIS (WKN: A0J202) tracks the appreciation of the ICE US Treasury 1-3 Year Bond Index. The Fund typically invests at least 90% of its assets in the bonds of the underlying index, and at least 95% of its assets in US government bonds. This index assesses compliance with US Treasury Public Obligations. These obligations have a remaining term of more than one year and a maximum of three years.
Various providers in this category are:
Barclays Capital, Charles Schwab, German Asset Management, Franklin Templeton Investments, Goldman Sachs, Invesco PowerShares, iShares, PIMCO, State Street SPDR, Vanguard, WisdomTree.
Commodities ETFs (Commodities)
Commodities ETFs are funds that invest in certain commodities or possibly several different commodities. Raw materials typically found in these funds are precious metals, livestock, oil, coffee and sugar.
A good example is the iShares Divers Commodity Swap UCITS ETF (WKN: A0H072), which simulates as closely as possible the performance of the Bloomberg Commodity SM (Total Return Index). This index tracks the performance of broadly diversified commodity markets, which include the energy, argar, industrial metals, precious metals and livestock sectors.
Various providers in this category are:
Barclays Capital, Credit Suisse, Direxion, Elkhorn, ETF Securities, First Trust, Goldman Sachs, GraniteShares, Invesco PowerShares, iShares, ProShares, Swedish Export Credit Corporation, UBS, US Commodity Funds, WisdomTree.
Well known is the MSCI World, an international stock index that tracks the performance of more than 1,600 companies from 23 countries. Calculated this index of the US financial services provider MSCI since 1970. He is recommended by experts, especially because of its wide dispersion. With so many different companies, industries and countries included, it is an ideal foundation for a diversified investment portfolio.
Countries in the MSCI World and their respective weight
The MSCI World is limited to large and mid-sized companies from countries that are rated by MSCI as developed industrialized countries. Accordingly, emerging markets such as China and Brazil are not represented.
For each country, the index covers about 85% of the so-called market capitalization. Market capitalization is the stock market value of all listed stock corporations.
To give one example, at the end of 2016, there were approximately 640 public limited companies in Germany. According to Deutsche Börse, its market capitalization was over 1,600 billion euros.
The index-eligible countries are then weighed according to their market capitalization. Accordingly, the share of US equities is by far the largest.
However, it must be pointed out that the respective share of a country is by no means constant. Rather, it depends on developments in the respective stock markets and fluctuates over time.
Incidentally, the country weight are in no way limited. So if, for example, the US stock market continues to evolve, US share may continue to rise and affect the index even more.
A good example is the iShares MSCI
World UCITS ETF - USD DIS (WKN: A0HGV0). The Fund seeks to replicate the return of the MSCI World Index through the combination of capital growth and fund-of-funds returns. In doing so, the Fund seeks, as far as possible, to invest in the equity securities (eg shares) from which the Reference Index is formed.
While the MSCI World considers countries around the world, in regional index ETFs, companies can be found in a specific geographic region, as the name implies.
Regional Index ETFs
Asia Pacific Equities ETFs:
For example, Asia-Pacific ETFs are funds that invest their money primarily in companies or governments in the Asia-Pacific region, typically in Hong Kong, South Korea, and Japan.
With the iShares Emerging Asia Local Government Bond UCITS ETF - USD DIS (WKN: A1JTNB), you can invest in some of the emerging Asian economies. The underlying index is the Barclays Emerging Markets Asia Local Currency Government Country Capped Index. The Fund will, as far as practicable, invest in fixed income securities (such as bonds) that make up the Index. The Index measures the performance of local currency emerging market Asian debt (China, Indonesia, Malaysia, Philippines, South Korea and Thailand).
In this way, you can gain access to stocks that rise in value should the economic importance of Asia continue to increase in importance.
AdvisorShares, ARK Investment Management, Deutsche Asset Management, Direxion, First Trust, Franklin Templeton Investments, Global X, IndexIQ, Invesco PowerShares, iShares, Kraneshares, O'Shares, State Street SPDR, Vanguard, WisdomTree.
Country specific ETFs:
These ETFs track the stock market index of a particular country. For example, Germany invests in ETFs in shares of companies based in Germany.
The DAX ETF Lyxor Daily Levdax UCITS ETF-ACC - EUR ACC (WKN: LYX0AD) is the perfect example. This index fund is an UCITS-compliant exchange-traded fund that tracks the benchmark index LEVDAX. The LevDax indicates the double performance of the DAX Index minus the financing costs. The investor also receives almost double the dividend yield of the index values.
Currency risk when investing abroad
Finally, it should not be concealed that, of course, there is a certain currency risk when investing in foreign countries.
Currency risk is the very real risk that the country's currency may fall or rise in value relative to that of its own country.
If, for example, an investor holds US equities and the US dollar depreciates against the euro, then the value of US equities also falls.
Caution: Currency risk also exists when the fund currency is Euro. This is because the calculation only uses the currency underlying the assets in which the ETF invested.
The only way to prevent, or at least significantly reduce, this currency risk is to favor a currency-hedged ETF. In this case, the fund management undertakes to hedge currency risks.
With index funds you can engage in different industries, countries, regions and worldwide. With the help of the index funds, one can also invest in regions and asset classes that would otherwise not have access as a small private investor.
Investors should definitely take enough time and best use the advice of an experienced specialist in order to find the right solution for their individual situation and investment perspective.