International equities are stocks purchased outside the United States market. International equity funds are the same as international mutual funds or international stock funds. But the bottom-line principle is the same: They consist of non-U.S. stocks.
These funds purchase stocks based on a specific investing strategy and then sell the blend of shares to various investors. The only real difference, in this case, is that all the stocks are in companies or other sources based outside the U.S. This is important information.
Avoid Confusion with “Global” Equities
Although similar, these funds are different than global equity funds. Global equity funds consist of stocks from around the globe, including U.S.-based stocks. International equity funds do not hold U.S. stocks.
Understanding the Types of International Equities
A variety of types of international equity funds exist. Here are a few examples:
- Emerging market equities: These are investments in companies from developing countries, which often have high growth potential but also carry risks because of economic and political issues.
- Sector-based international equities: These international equities focus on a specific sector. For example, the fund may invest in energy companies (or tech, agriculture, real estate, etc.) outside the U.S.
- Country-specific international equities: Equities invested in a specific nation are country-specific. They create concentrated exposure in that nation, and while growth potential is significant, diversification is limited.
- Region-specific International equities: Casting a wider net, this type invests in a specific region, such as Central America, Southeast Asia, or Western Africa. They could also make investments in an entire continent.
What are the Benefits?
Numerous benefits come from owning international equities. The biggest, however, is diversification. Portfolio diversity is a common goal for virtually every investor. A diverse investment strategy, which spreads investments across numerous opportunities, significantly reduces the risk of failure and decline.
International equities are an essential part of a diverse portfolio, which is why so many experts strongly recommend about 30% (or more, depending on who you ask) into international markets.
U.S. and international markets don’t always move in the same direction, which is considerably good. As one market goes down, the other market may be going in the inverse, up. As one declines, the other may hold firm, providing stability to your portfolio.
By investing in international markets, stockholders reduce the impact of regional and country-specific economic downturns.
This is about more than simply reducing risk. Investing internationally gives investors access to new growth opportunities outside the domestic market. While risk remains (and will remain, regardless of where you invest), international equities can lead to higher returns, especially in emerging markets.
National economies fluctuate. They start, accelerate, slow, creep forward, then accelerate again. (We’ve seen this firsthand in the U.S.) Different nations experience this slow-fast cycle at different times.
While one nation is slowing, another is growing. While one is experiencing market-halting upheaval, another is perfectly positioned for massive exportation of materials and products. By investing in international equities, a portfolio can balance the declines of one nation or region with the gains of another.
Currencies also come into account. International equity funds create exposure to foreign currencies, which creates another layer of diversification.
Are There Any Downsides to International Equities?
Like any investment strategy, there are downsides to international equities, mainly if those equities are too concentrated in a country or sector.
One of the main risks is currency exposure. Although currency exposure, as we discussed, can diversify a portfolio, the value of a dollar will change compared to the value of the fund’s base currency. When the dollar is weak, this will help boost returns even when the investment is performing weakly. However, when the dollar is strong, returns are reducible even in strong international stocks.
Political risk is also a factor. Investing in emerging markets creates the potential for massive returns, but these countries often go through spasms of upheaval and uncertainty. If a government faces turmoil, it will create a risk to investments in that nation. This is why stocks in stable, well-established countries (think Germany or India) are often mixed with investments in emerging but less stable markets.
Buyers for international equities are also of concern. If you have a strong, stable U.S. stock (or even a weak one, for that matter), you guarantee yourself to find a buyer. But finding a buyer for international investments can be more difficult.
With global economic uncertainty and constant political changes, international equities are sometimes tricky to offload. They are, essentially, less liquid than other stock options.
Although there are downsides, a diverse, well-managed international equity fund can bring stability to your portfolio and mitigate these risks.
What Type of Investor Should Consider International Equities
We would never recommend investing all your retirement funds into international markets. We would, however, recommend investing at least a portion of your portfolio in various international equities.
While this investment strategy is helpful for any investors at any phase of their journeys, these equities are especially useful for people with a decent or extensive investment portfolio whose primary goal is to hold the fund strong and reduce risk as much as possible.
As you near retirement age, you want to ensure that investments do not bottom out. If the portfolio declines, you won’t have time to make up the difference like you could have 25 years ago. Therefore, you must spread the portfolio widely and focus on risk-reduction strategies. International equities are a vital part of this agenda.
All investors, including those starting, should have some of their portfolio in international equities, but they are significant for people further along their investment journey.
Amerant Bank is here to answer all of your international investment questions. Contact our team today and let our experts help with your banking needs!
