Investing in International with ETFs

Executive Summary

  • Performance of US Stocks has been flat since Jan. 2000
  • International stocks had a stronger recovery from last bear market
  • International presents more risk which is rewarded over time
  • Ways to invest with Exchange Traded Products:

New Investor/Accumulator:

Vanguard FTSE All World (VT)
Vanguard FTSE All World ex-US(VEU)

Diversify beyond EAFE:

MSCI Emerging Markets Index Fund (EEM)
Vanguard Emerging Markets ETF (VWO)

Sector Investing:

iShares S&P Global Sector Family
State Street S&P International Sector Family

Fundamental Investor:

WisdomTree DEFA Fund (DWM)
International Dividend Achievers Portfolio (PID)

Income/Capital Preservation:

SPDR DB International Government Inflation-Protected Bond ETF (WIP)
SPDR DJ Wilshire International Real Estate ETF (RWX)

Investment case

US Stocks

When you step back and take a look at US Equity performance for this decade, you pretty quickly come to the conclusion that there’s gotta be a better way.

After the dot com bubble burst, the S&P 500 has taken its time to climb back to year 2000 levels, finally getting there in October 2007.

Then, just when we thought we were above water, along comes 2008.

S&P 500 Index
(click to expand)

So the 2000s have not been kind to US stocks.

International Stocks

Over the same time period international stocks also bottomed out in 1993, but the recovery for international was faster and went beyond Year 2000 levels.

So if you haven’t been in international stocks, chances are you are still looking back fondly on your account statements from 8 years ago.

Vanguard Total International Stock Index
(click to expand)

But what about the downward slide we are seeing in 2008? Let’s take a look at single year performance statistics.

Single Year Performance

In this chart, you see a of summary single year performance over a 10 year period for 3 international markets and the S&P 500.

MSCI Benchmarks
(click to expand)

For each market, the best, worst and median single year returns are compared and one conclusion is that there was less volatility in the US market as measured by the difference between the best single and the worst single year.

However, that isn’t necessarily a good thing – while the worst performance for US stocks nearly matched or even exceeded the Pacific and European markets, the upside for US returns was well below the other markets.

The net result is lower overall volatility – up and down – but median returns well below that of Europe for example.

The takeaway here is that there is “risk” involved with international investing, but if you let the markets play out long enough, the risk is rewarded appropriately.


Depending on how you define international, there 200+ funds and well over $100 billion invested in International ETFs – how do you sort through such a large and diverse selection?

Organization Framework

ETF MarketPro has designecd a framework that puts International ETFs in 4 buckets – Geographic, Sector,  Asset Class and Market Cap/Style.

Geographic ETFs can range from “all of international” – to regions such as Asia or Europe – to single countries like South Africa or Israel.

Economic groupings are also in this category – for example the Emerging Market ETFs and the emerging-emerging markets that are know asFrontier Market ETFs.

In the Sector category are the ETFs that are organized by industry or industry group – sectors range from financials to energy to telecom to healthcare.

The idea behind the Asset Class bucket is that International ETFs go beyond just common stock.  Preferred stock, government debt, high yield debt, real estate and currency ETFs are also available.

Under the Market Cap/Style heading are ETFs that are organized by market capitalization – e.g. mega cap, large cap, mid cap and small cap ETFs.  This is also the location for ETFs that are organized by style– i.e. growth or value.

Top 6 International ETFs

The largest international ETF by far is the MSCI EAFE Index Fund(EFA) with $36 billion of assets under management.  EAFE stands for Europe, Australsian and Far East which are the regions where the fund invests.

The EAFE fund holds over 1,000 stocks with a combined market cap of nearly $16 trillion. The strength of this fund is that it provides very significant international coverage at a low cost

There are a couple of small drawbacks to note for the EAFE fund – first, over the years it has become more closely correlated to the US stocks – according to the iShares website, the beta relative to the S&P 500 is 1.05 which means that EAFE and the S&P 500 move nearly in lock step – or the other way to think about it is that you are not going to get a lot of diversification with EAFE.

Second, the fund does not include the emerging markets where we’ve seen a lot of recent growth.
The next 2 biggest International ETFs are both Emerging Markets funds – the MSCI Emerging Markets Index Fund (EEM) and theVanguard Emerging Markets ETF(VWO).

How big are the Emerging Markets?  The MSCI Index tracks 765 companies with a combined market cap of over $7 trillion.

The beta of the iShares fund relative to the S&P 500 is 1.47 which means that you will get diversification here.
The Vanguard fund is similar to the iShares fund – it actually tracks the same index, so you’ll get the same top holdings like Gazprom, Samsung, PetroBras, China Mobile and Vale in both funds.

However, the Vanguard offering has a significantly lower expense ratio – 0.25% compared to 0.74% for the iShares’ fund.

The other difference between the two is that the Vanguard fund owns all 765 stocks in the index while the iShares fund uses a sampling strategy which cuts the number of stocks owned down into the 325 or so.

To round out the list of the biggest International ETFs are 3 country ETFs, and the countries should be no surprise, Brazil – MSCI Brazil Index Fund (EWZ), Japan – MSCI Japan Index Fund (EWJ)  and China – FTSE-Xinhua China 25 Index Fund (FXI).

A Note About the International Directory

To make comparisons easier, not all international ETFs are in the International Directory.

Also see the Global ETF DirectoryCountry ETF Directory and theInternational Fixed Income ETF Directory.

Top Performers


1. MSCI EAFE Index Fund (EFA)

2. MSCI Emerging Markets Index Fund (EEM)

Lowest Cost

1. Vanguard Pacific ETF (VPL)

2. Vanguard FTSE All-World ex-US ETF (VEU)

Highest Yield

1. MSCI EMU Index Fund (EZU)

2. S&P Europe 350 Index Fund (IEV)

See the directory.