For Canadian investors wondering how to buy international stocks, ADRs and international ETFs may be a safer option than picking individual overseas stocks
We believe most investors could benefit from holding some foreign and international investments in their portfolios for added diversification. And growing markets like China and India have positive long-term outlooks. Their populations are generally younger than those in North America, and rising incomes are helping more of their people advance into the middle class.
Still, direct international investing remains riskier than investing in North America. Many foreign stock markets, and especially in emerging countries have language barriers, uncertain investor-protection laws, and a weaker commitment to the openness, fairness and other qualities we tend to take for granted in established markets. If you are interested in successfully learning how to buy international stocks, we have some tips for you below.
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For Canadians, focus on U.S. investments when you’re considering how to buy international stocks
Our view on foreign investing is that U.S. stocks can provide all the foreign exposure most investors need. We also feel that virtually all Canadian investors should have 20% to 30% of their portfolios in the U.S. stocks that we recommend in our Wall Street Stock Forecaster newsletter.
If you want to add more foreign content, you could buy individual stocks. But for most investors, as we mentioned earlier, directly investing in foreign stocks can add an extra layer of risk and expense. As well, timely and accurate information about overseas companies is not always available, and securities regulations vary widely between countries. It can also be hard for your broker to buy shares on foreign markets without paying a premium. Tax rules and restrictions on transferring funds between nations add further uncertainty and cost.
Discover how to buy international stocks more easily with American Depositary Receipts (ADRs)
An American Depositary Receipt, or ADR, is a certificate that represents a foreign stock that trades in the United States. Banks and brokerage firms in the U.S. issue or sponsor ADRs, and investors buy and sell them on U.S. stock markets, just like regular stocks.
Each American Depositary Receipt may represent one or more shares of the foreign stock. However, if the stock is expensive, the ADR may represent a fraction of a share. That way, the ADR will start trading at a moderate price, or be in the price range of similar stocks on the exchange where it trades. The price of an ADR usually stays close to the price of the foreign stock in its home market.
If you own an American Depositary Receipt, you have the right to obtain the foreign stock it represents. However, investors usually find it more convenient to continue holding ADRs as part of their strategy for portfolio diversification.
ADRs make foreign investing much easier and safer for individual investors. The foreign company must provide detailed financial information to U.S. regulators and to the sponsor, or “depositary,” bank or broker. Since ADRs trade on U.S. stock markets, you don’t have to worry about foreign currencies or foreign stock-exchange rules or a language barrier. Price information is readily available, and transaction costs are lower. Trades will clear and settle in U.S. dollars. As well, the depositary bank or broker will convert any dividends or other cash payments into U.S. dollars before it sends them on to you.
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Don’t pass over these two great options so you can profit safely when buying international stocks
Blue-chip U.S. companies: As a Canadian, a simple way to gain exposure in the global stock market while lowering your risk is to invest in U.S. stocks. We advise keeping around, say, 25% of your portfolio in U.S. stocks, or ETFs that hold them. That’s because many blue-chip U.S. stocks have operations in many countries. This will let them benefit from a rebounding global economy, as well as a return to prosperity in the U.S.
International exchange-traded funds (ETFs): Exchange-traded funds offer investors more benefits than ever before, mainly because of increased competition. That can make them good choices for certain parts of your portfolio—such as the portion you devote to global stock market investing.
Use caution with emerging markets when you think about how to buy international stocks for your portfolio
Emerging markets are countries or geographic regions with economies that are for the most part growing rapidly—but they are also riskier.
India, China, Brazil, Mexico, Russia, Malaysia, Thailand, Indonesia, the Philippines, Poland and Turkey are all examples of emerging markets.
We think that most conservative investors could hold up to 10% of their portfolios in foreign stocks (apart from the U.S.)—and emerging markets could make up part of that component.
Investing in emerging-market ETFs or stocks is most suitable for the aggressive segment of your portfolio.
What is your opinion on investing in international stocks? Do you stick to North American options, or have you gone to international markets to buy stocks directly?
Is there a place for international stocks in your portfolio or do you feel like they are too risky?
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