The growth in the financial market has allowed investors to explore more investment options both in their country and internationally. Global funds provide opportunities to diversify portfolios to mitigate risk and improve returns.
In the last few years, exchange-traded funds (ETFs) have seen a steep rise in popularity among investors. Like mutual funds, ETFs also invest pooled funds into various stocks, following a benchmark index. However, one can trade these funds in the stock exchange like regular stocks and use them in trading strategies.
ETFs can be structured to track anything, from the price of single security to a group of securities and even an investment strategy. An ETF holds multiple stocks, offering instant diversification. These funds trade in the exchange in premium or discount based on the changes in the price of underlying assets. There are various types of ETF schemes available for investing, and with the rise in demand, several more are emerging. Global ETF has also become pretty popular among investors seeking international portfolio exposure.
In English, two words, global and international, are used interchangeably. Hence, the confusion. But global and international funds are different in their characters and provide investors with versatile investment opportunities. It is up to the investors to perform a backcheck before investing.
The primary distinction between global and international ETFs is that global ETFs invest in the worldwide market, including the country you are residing in. International ETFs invest only in the market outside the country.
Understanding global ETFs
The phrase global fund indicates a fund with a diversified portfolio in all countries, including the domestic country. These funds help investors avoid country-specific risks.
Investors investing in these funds already have low exposure in their domestic country and don’t want to increase the sovereign risk level by investing in the international market. The mix of domestic and international investment works well for them.
Investors in the global funds benefit when domestic and international markets are performing. It also helps mitigate country-specific risks. Even if news regarding one country takes the market down, they will continue to earn high returns when the other countries perform well.
These funds invest in securities from all other countries except the domestic nation of the investor. International funds can be structured to follow a particular country or a basket. If you already have sufficient exposure in the domestic market and want to increase the international orientation of your portfolio, then these funds are suitable for you.
International funds can invest in developed countries or in emerging economies, which are less mature and carry higher risks. Just because these funds are called international, it doesn’t mean they invest in every foreign country.
When to choose one over the other?
As you might have understood from the discussion above, global and international funds are subtly different from each other. Now the question is which one to choose and when.
The global fund allows the fund manager to move the investment around the international market and the domestic companies to take advantage of relative opportunities presented by these markets. However, by investing in global funds, investors may not always know at a given point the actual exposure to the domestic and international market of their portfolios. To avoid the concentration of risks, some investors disperse troubles with broader asset allocation. It allows them to adhere to their desired international or domestic asset allocation.
The bottom line
Investing in a global ETF is a matter of choice, and it should align with individual investment goals. However, before investing in global ETFs, investors must apprise themselves of the inherent risks associated with Forex rate changes. Some funds opt for investing strategies that mitigate risks arising from fluctuating currency rates, but others incorporate it as an element of portfolio performance. Read the investment prospectus carefully before investing to avoid any debacle in the future.