6.4 International mutual funds and ETFs

International mutual funds and ETFs offer investors easy access to global markets. These investment vehicles pool money to buy foreign securities, providing diversification across countries and regions while simplifying the process of investing abroad.

Understanding these funds is crucial for navigating the complexities of international investing. They offer benefits like professional management and lower transaction costs, but also come with unique considerations such as currency risk and regulatory challenges.

Understanding International Mutual Funds and ETFs

International mutual funds and ETFs

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• International mutual funds pool investor money managed by professionals invest in foreign securities (stocks, bonds) provide diversification across countries and regions
• Exchange-traded funds (ETFs) trade on stock exchanges track specific indexes, sectors, or asset classes focus on international markets or regions
• Global investment strategies expose portfolios to foreign markets diversify geographically access emerging and developed economies hedge domestic risks tap global growth opportunities

International funds vs direct foreign investment

• International funds and ETFs offer professional management and research diversify across securities and countries lower transaction costs simplify tax reporting provide liquidity (especially ETFs)
• Drawbacks include management fees potential tracking error (ETFs) less control over security selection currency risk exposure
• Direct foreign investment allows greater control over decisions potential higher returns through stock selection ability to target specific companies
• Challenges of direct investment higher transaction costs increased research requirements complex foreign regulations currency conversion costs complicated tax reporting

Performance factors of international funds

• Fund management expertise impacts performance active vs passive approaches affect returns
• Diversification across geographies sectors market caps influences risk-return profile
• Global economic cycles political events currency fluctuations shape market conditions
• Fund size expense ratios tracking error (ETFs) asset liquidity market volatility affect performance

Tax and regulatory considerations

• Foreign tax credits withholding taxes capital gains treatment Passive Foreign Investment Company (PFIC) rules impact returns
• SEC regulations for US funds local market restrictions reporting requirements (FATCA) vary by jurisdiction
• Fund domicile (US, Luxembourg, Ireland) double taxation treaties foreign ownership limits affect investment options
• FATCA and Common Reporting Standard (CRS) ensure compliance and information exchange
• UCITS in Europe and Registered Investment Companies (RICs) in US structure investments differently
• Hedged vs unhedged share classes impact currency effects on returns and taxation