These 5 International ETFs Add Stocks From Outside the U.S.

Five international ETFs provide investors with exposure to global markets beyond the United States. While these funds share the goal of diversifying portfolios, each has unique characteristics that investors should consider before adding them to their portfolios.

The Vanguard FTSE Developed Markets ETF (VEA) and the iShares Core MSCI EAFE ETF (IEFA) both focus on developed global markets. These economies feature highly industrialized economies, high household and per capita incomes, mature capital markets, and strong regulatory and legal systems. Despite sharing a similar approach, VEA holds companies from all developed economies except the U.S., whereas IEFA also excludes Canada.

VEA offers a slightly broader selection of stocks, including Canadian stocks, and boasts a lower expense ratio, making it a cost-effective option for those seeking developed market exposure.

In contrast, the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets ETF (EEM) concentrate on emerging markets, which are economies transitioning to developed status. Emerging markets generally experience higher GDP growth rates, rapid industrialization, and increased integration into the global financial system.

However, EEM differs from VWO in several ways. EEM includes companies from South Korea, while VWO does not. Additionally, EEM holds a higher percentage of assets in technology companies (over 37%) compared to VWO. Investors should consider this factor when evaluating the diversification benefits of each fund. VWO is suited for investors seeking low-cost exposure to emerging markets, while EEM is better suited for those seeking concentrated exposure, particularly to tech-focused markets like Taiwan and South Korea.

The Vanguard Total International Stock ETF (VXUS) offers broad exposure to markets outside the U.S., encompassing both developed and emerging economies. With holdings in 8,901 stocks from around the world, VXUS provides a comprehensive international diversification solution at a reasonable 0.05% expense ratio. Although it has some exposure to emerging markets (26.6%), it is less concentrated in this area compared to an emerging-market ETF.

VXUS is an excellent choice for investors seeking a single fund that covers a wide range of international markets, albeit with a slightly higher risk than developed market ETFs.

In summary, international ETFs play a crucial role in diversifying portfolios beyond the U.S. stock market. Understanding each fund's focus area is essential, as emerging market ETFs carry more risk. Developed market ETFs, such as VEA and IEFA, offer lower risk and broader diversification, while VXUS provides a more comprehensive international exposure for investors seeking a single, all-encompassing solution.