The US stock market offers a huge range of investment opportunities. It is the world’s largest capital market, leading to many foreign companies directly listing their stock on US stock exchanges like the NYSE or the Nasdaq. There’s still a whole world of investment opportunities outside the US, and many investors want to know how to invest in foreign stocks.
Here are three ways in which US investors can gain access to foreign markets and get exposure to the growth of other economies.
1. Investing In Foreign Stock Through the US Markets
The first option is to check if a foreign company has listed American Depository Receipts or ADRs on a US stock exchange.
Here’s how it works. A financial institution (often a bank) buys foreign shares and holds them in a foreign subsidiary. The bank holds this share in inventory and emits an ADR to allow US investors to trade the foreign share directly on the US market and in dollars.
ADRs are a great option for US investors who want to invest in non-US stock markets without having to buy from a foreign stock exchange or another currency.
Unfortunately, ADRs are not available for all stocks. They are usually available only for the stocks popular enough for the bank to be interested to do all this work.
Another similar option is a Global Depository Receipt or GDR. A GDR is similar to an ADR except the listing is done in the US and other countries, often in Europe or Asia.
2. ETFs and Mutual Funds
It’s possible that American stock market investors don’t always want to choose specific stocks. Many investors prefer to diversify their portfolios or focus on a specific area of the market (e.g., emerging markets, Europe, Asian technology, etc.). Such exposure might be offered through international mutual funds or ETFs.
There are thousands of different options on offer, allowing for very detailed targeting.
3. Direct Investing
Some foreign stocks do not have ADRs or GDRs available. Even if they are part of an ETF, you may not be interested in buying another 90 stocks at the same time. Maybe you have a specific opinion on this specific stock and want to buy only this one.
In this case, you need a broker able to give you access to foreign markets. Such a broker should be a reputable one, and saving on fees should not be a reason to go to a third-rate provider.
Here you have a choice of going with a US broker that will give you access to foreign exchanges or opening a brokerage account overseas. Let’s explore both of those options.
4. Exchange-Traded Funds (ETFs)
An international exchange-traded fund offers investors a convenient way to access foreign markets. Picking the right exchange-traded fund (ETF) can be simpler than constructing a portfolio of stocks by yourself.
Some ETFs provide exposure to multiple markets, while others focus on a single country. These funds cover a number of investment categories such as market capitalization, geographical region, investment styles, and sectors.
Prominent ETF providers include iShares by BlackRock, State Street Global Advisors, Vanguard, FlexShares, Charles Schwab, Direxion, First Trust, Guggenheim Investments, Invesco, WisdomTree, and VanEck. Before buying an international ETF, investors should consider costs and fees, liquidity, trading volumes, tax issues, and portfolio holdings.
5. Multinational Corporations (MNCs)
Investors not comfortable with buying foreign stocks directly, and even those who are wary of ADRs or mutual funds, can seek out domestic companies that derive a significant portion of sales from overseas.
Multinational corporations (MNCs) are best suited for this purpose. This could mean buying The Coca-Cola Company (KO) or McDonald’s (MCD), both of which generate the majority of revenue from global operations.8 9 This is a back door approach and does not provide true international diversification, though it does give investors international exposure.
The Bottom Line
Knowledge about the political and economic conditions in the country you’re investing in is essential to understanding the factors that could impact your returns. As always, investors should focus on their investment objectives, costs, and prospective returns, balancing those factors with their risk tolerance.