International investing is about channeling capital into foreign markets beyond the domestic economy. This means buying stocks and shares in businesses and investment vessels overseas or listed in foreign markets.
What is international investing?
Many investors exhibit the ‘home bias’ effect, in that they only invest in well-known domestic names. This works if the local economy is large and growing rapidly. Unfortunately, all economies experience up and down cycles. By investing overseas investors can benefit from exceptional growth in other markets.
Legendary investor John Templeton, the founder of the Templeton funds, achieved his fame by investing around the world. He discovered that there are many excellent growth companies globally at any one time, and he could profit handsomely if he can spot and buy these excellent markets. Riding on the coattails of these long-term growth stories yielded enormous profits for him. You can replicate his success in global investing too.
Benefits of international investing include:
- Diversification – from the ups and downs of the home market
- Growth – especially from fast-growing economies and emerging markets (e.g., China and India)
- Bargain opportunities – particularly when a financial crisis hit a region or market (e.g., 1997 in Asia)
In the UK, there are now many investment platforms offering low-cost international share dealing. You can buy some foreign shares as easily as domestic UK ones.
How to invest in international stocks and markets
To invest in overseas shares you need a stockbroker that offers global market access. International investing could help you make money with overseas markets. Where there are growing economies in the World, there are opportunities to grow your wealth through investments in high performing companies, assets or markets. Here is how to invest in international markets.
The old adage – ‘ the world is your oyster’ – is more relevant to investors than ever before. As technology pulls nations ever closer, investors have at their fingertips more investment choices now than a generation ago. Here’s how to start international investing and how you can navigate the World of international and overseas investing to reap the largest benefits.
Essential Reading: How to invest in stocks and buy shares online
Risks of international investing
Buying foreign shares is slightly more involved than buying local stocks. This is because there are additional trading frictions, such as foreign exchange movements.
Some things you should look for includes:
- Exchange rate risk – is the local currency trending up or down?
- Exchange rate charge
- Transaction costs
- Taxation of dividends
Most platforms can buy and sell foreign shares on your behalf for a reasonable fee. For example, Interactive Investor charges a fixed £7.99 fee to buy shares in some popular foreign markets such as Canada.
How to invest in foreign securities
There are several ways to buy foreign stocks.
- Direct – buy and hold foreign stocks directly in your accounts
- Funds – Buy dedicated and actively managed investment funds that invest in foreign markets
- ETFs – Buy ETFs that tracks foreign stocks markets.
Your risk appetite and knowledge will determine how you invest in foreign stocks.
For example, which markets will you invest? If you can’t decide, perhaps buying a global equity fund may be more suitable.
Another important issue to consider is the time frame. Are you intending to trade or hold for the long term? When you are actively buying and selling foreign stocks, charges will increase. The ISA route may no longer be the best choice.
How to choose a stock broker for international investing
Once you have narrowed down a list, you have to find out more how international dealing works for each broker.
Some pointer questions include:
- Can you buy and sell foreign shares within the ISA framework? ISA offers enormous tax advantages for UK investors because it is tax efficient.
- Which markets do they operate? see, e.g., above
- What is the transaction cost for each trade? Does it drop for frequent investing?
- What is the additional foreign exchange costs for each trade? Most brokers will incur a spread around the prevailing spot rate.
- Is there a minimum size to deal in that market?
- Can you trade the market online? Some markets are phone-only, meaning you need to call the broker to ask them to execute the trade on your behalf. This may be more expensive.
- Does the broke offer foreign currency account that let you buy and sell, say, USD stocks, without converting back to sterling each time?
- How do the stockbrokers keep track of your foreign ownership? These days are mostly electronic.
Comparing account fees for international investing
| Brokers | Transaction Cost |
|---|---|
| Interactive Investor | £7.99 |
| Hargreaves | £11.95 |
| IG | £10 (US) 0.1% (European) |
| AJ Bell | £9.95 |
In addition to the above transaction cost, there is the FX charge. Many start from 0.5%-1.0%, which tends to go down depending on the size of the trade.
There may be further costs involved, for example, local transaction tax, stock exchange fees, stamp duty, or takeover levy et cetera. Some these fees are only applicable above certain threshold or in certain markets. You will have to find out more from your stockbroker.
Local ETFs that invest internationally
One of the most important developments of the fund industry over the past twenty years is the proliferation of exchange-traded funds (ETFs).
These funds aim to replicate a popular index, such as the S&P 500 or FTSE 100, and let investors buy the instrument like any other stocks. This segment of the market started in the US and is growing rapidly in Europe.
In the past, you can only buy say, S&P 500 ETF (ticker SPY) in the US. But now more and more ETFs have multiple listings in the world. You can buy some of these locally-listed ETFs priced in the local currency.
These ETFs offer huge advantages for UK-based investors because:
- Availability – Available to buy in local markets at low cost (same as local stocks)
- Trading hours – you can buy and sell these ETFs during local market hours (8am – 4.30pm UK time)
- International exposure – as the fund tracks the foreign index
- Currency hedged – most ETFs automatically take foreign currency movements into account
- Foreign currency account – is not needed to hold these ETFs (lower conversion fees)
For example, one of the popular ETFs listed in the London Stock Exchange (LSE) is the one that tracks the US – the Vanguard ETF (VUSA).
Specifically, the £24 billion fund tracks the S&P 500 Index and is priced in Sterling. Since it is listed in the LSE, it is available to most investors in their normal ISA accounts. Thus you can buy and sell it like a local stock – but capturing the extensive upside of the US market (see below). Isn’t this wonderful?
US Stocks and Markets
United States has the biggest stock market in the world. This is natural because its economy is the largest and most dynamic, augmented with deep capital markets driven by Wall Street. Most US companies are either listed in the New York Stock Exchange or the Nasdaq. The latter typically includes technology, bio-tech and fast-growing companies such as Facebook (FB) or Tesla (TSLA).
British clients can invest in the US within the ISA framework. But there are a few things to bear in mind. The first is that most ISA accounts are sterling-based. This means brokers will need to change sterling assets into US Dollars to execute a buy trade; and sell US assets and convert the dollar proceeds into pound sterling. This may incur charges and exchange rate risk.
The other point is that UK account holders (apart from SIPP) will need to sign the W-8Ben Form to reduce the withholding tax on dividends. Most brokers provide this service.
The third point regards stock picking. Unless you have a strong view on certain sectors or stocks, a growing number of investors are looking to buy into diversified funds with a strong emphasis on US assets. For example, you may buy the FTSE-100 listed Scottish Mortgage Trust (SMT) – a fund that invests heavily in US stocks.
In the US, main-street investors are no longer picking stocks. Instead, they are favour buying broad or sector equity ETFs. According to the Financial Times, nearly half a trillion dollars flowed into stock ETFs over the past two quarters.
This trend is extending to the UK, albeit at a slower time scale. UK investors who wish to buy into the large Nasdaq-listed stocks can look to the LSE-listed Nasdaq 100 ETF (EQQQ) or Nasdaq 100 Sterling Hedged (EQGB). The latter hedges the currency impact.
Brokers to consider: IG (£0 transaction cost for frequent trader), Interactive Investors
European Stocks and Markets
Europe is the closest international equity markets to the UK. The region offers a host of world-class companies available to British investors.
Did you know that LVMH (ticker MC) is now the largest European stock by far? Its $400 billion in market capitalisation has made its owner Bernard Arnault the richest family in the world ($192 billion, as of 30 July), ahead of Amazon’s Jeff Bezos.
How do you buy into such fantastic company? First you can buy the stock directly. But you would have missed out other luxury stocks like Hermes or Kering. Many resorted to buy dedicated France ETF.
One such ETF listed in the UK the the £3.4 billion Lyxor CAC 40 ETF (CACX). The fund holds all the stocks as defined by the CAC 40 Index. The weighting of LVMH in the fund is 12.2% (see factsheet here).
However, some investors prefer an even wider selection of stocks. Again, there is this Stoxx 600 ETF listed in the UK called xTrackers Euro 600 ETF (XSX6).
Brokers: AJ Bell, Interactive Brokers
Japanese Stocks and Markets
Japan is the third largest economy in the world. For years, the Japanese economy has been stuck in a low-growth environment due to the bursting of the asset bubble back in 1990. To revive the country, the Bank of Japan is running an extraordinary quantitative easing program since 2013 which helps to fuel a rally in Japanese stocks.
How do you invest in Japan? For most UK-based investors, the first avenue is to buy Japanese Funds. Two big investment trusts that invest solely in Japan are the JP Morgan Japan Trust (JFJ), with nearly £1 billion in assets, and Baillie Gifford Japan (BGFD). A small list of Japanese-related trusts and funds is tabled below.
Source: Interactive Investors
Another way to gain exposure to Japan is via exchange-traded funds. The iShares MSCI Japan (CJPU, factsheet here) has about $570 million in AUM and tracks the MSCI Japan Index. The Dollar-based Fund gained about 24% over the past year.
If you insist on buying Japan stocks directly, you would have to search for brokers dedicated to overseas trading, as not all of them do. AJ Bell (AJ Bell review) is one such broker that can execute Japanese trades for UK-based customers, although it is phone-based only and has a minimum trade size of £10,000.
Brokers: AJ Bell, Interactive Investors (LSE funds and trusts)
Brazilian Stocks and Markets
Brazil was one of the hottest international destination in the years prior to the global financial crisis. Goldman Sachs, the premier US investment bank, coined the term BRIC in 2003 in recognition of the potential of these four countries – which are Brazil, Russia, India, and China.
In those days, investing in Brazil was not easy. Devaluation and huge asset fluctuations deterred the majority of investors. Plus, it is a foreign market. Doing independent research on Brazilian companies is difficult.
However, with the proliferation of indexing the whole process has become much simpler. But still, it is not an easy market to deal with directly unless large sums are involved (near institutional level). Retail investors would be better off buying exchange-traded funds that track Brazilian stocks. Most mass market investment platforms do not offer direct investing in Brazil.
As a result, investors turned to investment vehicles that invest in Brazil. One such popular fund is the NYSE-traded ETF iShares Brazil, with ticker EWZ. The $6.6 billion fund tracks the MSCI Brazil Index (factsheet) with Vale, one of the largest miners in the world, as its largest holdings. EWZ is a liquid instrument and most UK brokers are able to buy and sell the ETF from here, including Hargreaves Landsdown and Interactive Investor.
If you want to avoid dealing in foreign market, there is the equivalent of this ETF listed in the LSE – IBZL.
Brokers: Interactive Investors, Hargreaves
Australian Stocks and Markets
Australia is one of the most popular investment destinations in Asia. Its continent-sized land mass houses plenty of valuable commodities, including rare earths, uranium, iron ores, coal, copper and precious metals. Much of these minerals are exported to Asia. Many Australian companies got rich by striking gold in the land.
Because the country is part of Commonwealth, it is relatively easy for UK-based investors to invest there. Particular of interest are miners such as Rio Tinto and BHP, both of which are LSE-listed too.
UK investors through most stockbroking accounts will have access to individual Australian stocks. You can buy most Aussie stocks outside the ASX 200 Index.
Alternatively, you can invest in Australia using the ETF route as well. iShares Australia (SAUS) is one such instrument. This LSE-listed ETF is USD-based but trades in sterling. The ETF rose nearly 40% in the year to June-2021. You can check its factsheet here.
Brokers: IG, Interactive Investors
Canadian Stocks and Markets
Like Australia, Canada is part of the British Commonwealth. The country is well endowed with mineral resources, which makes the market a magnet for investors. UK investors have always been interested in the territory due to proximity, shared culture and language.
The Toronto Stock Exchange is fairly liquid. Most major ISA accounts offer the possibility of investing there. To do so, you will need to convert sterling to the canadian dollar to buy Canadian stocks, and convert CAD back to sterling when you sell.
The largest stock in the Canadian market is no longer a traditional bank – but Shopify (SHOP CN). Its market capitalisation exceeds $180 billion! You can either buy Shopify directly or hold a diversified portfolio of Canadian stocks via ETF.
One LSE-listed fund that focussed solely on Canadian stocks is the iShares Canada (CCAU, factsheet). The fund tracks the MSCI Canada Index and trades in sterling. One of its largest holdings in Shopify (8.8% weight).
Brokers: Interactive Investors
