Foreign stocks have become so popular in the United States that whole exchanges are now shopping abroad. Both the New York Stock Exchange and the Nasdaq have been competing to buy the centuries-old London Stock Exchange.
It's just another symptom of the fever individual investors have displayed for a few years now. In 2005, Americans put three times as much money into foreign stock funds as they did in domestic ones. This year, they've been flinging roughly $3 billion a week overseas, according to AMG Data Services.
What's the attraction?
European stocks are cheap, compared with U.S. issues. Developing markets, like many in Latin America and Asia, are growing rapidly and have the capacity for huge expansion.
Foreign stocks can help reduce the risks of an all-American portfolio. And some investors, like the clients of Oakland, California, money manager Jim Bell, are trying to steer at least some of their money away from U.S. markets because they are stressed by a weak and unpopular president fighting an expensive and unpopular war, he says. This creates a lot of stress for the U.S. economy.
Bell has been investing some 70 percent of his client's funds in foreign stocks recently, in part because of their concerns about the U.S. economy and in part because of his own beliefs about where opportunities lie. We think this is mandated and strategic, he says. Foreign markets are a better opportunity than the U.S. market.
Bell, who tends to use no-load mutual funds to get into industries and assets that seem to have a lot of investor momentum, says he sees opportunities all over the world.
He has been investing recently in the Janus Overseas Fund, which has put a lot of money into Asian countries (except Japan) and emerging markets, and in the Oakmark International Small Cap Fund, which is primarily focused on European stocks right now. He's also been buying the Oppenheimer Developing Markets Fund, a load fund, which is also Asia-heavy, with emphasis on India.
Many Asian companies are in a position to benefit from the growth of China, Bell says.
That's all true. But foreign investing isn't risk-free, especially this late in the game. If you're thinking of putting money abroad, know that yours isn't the first cash in. And consider these possible risks and concerns, too.
-- Different accounting standards. In the wake of Wall Street scandals and the passage of the Sarbanes-Oxley Act of 2002, American companies have been ramping up their audits and cleaning up their quarterly reports. That's not necessarily true of companies headquartered elsewhere.
In some European countries, accounting standards are as much a matter of word of honor as regulation. And standards in some developing countries remain lax. How do you know how much you can rely on earnings reports, for example, from a small Southeast Asian or Dominican start-up? This is a good reason to invest via mutual funds that have analysts on the ground in the countries they are investing in.
-- That weak dollar. Many investors neglect currency risk in their rush to take advantage of attractively priced international equities, says Russell Lundeberg Jr. of Barrett Capital Management in Richmond, Virginia. Currency fluctuations must be considered.
The dollar has recovered since last year, but not much. Buy foreign stocks now, with a weak dollar, and you may be paying more than foreign investors who are using their own currency. Furthermore, if the greenback falls more before you sell, you could trade out your profits into even less-valuable dollars.
The vast majority of mutual funds don't hedge their currency risk. Find one that does if you really want to take currency questions out of the investment decision.
-- Big expenses. Expense ratios matter just as much for international offerings as they do for domestic ones, says Morningstar analyst Gareth Lyons.
It does cost more to manage a foreign fund than a U.S. stock fund, but not so much more that you should give away your earnings in extra fees. For example, the average annual expense ratio for a diversified emerging market fund is 1.48 percent, reports Morningstar. Keep that figure in mind as a maximum.