Wall Street might be the dominant force on the world stage for investors, but it’s far from the only place to discover new opportunities. Now, as an uneven global economic outlook comes into play, it may be time for retail investors to explore the potential of international stocks. But how can they build their portfolios beyond borders?
The United States may have the world’s most dynamic economy, but two of the top 10 stocks globally by market capitalization, Saudi Aramco (2222.SR) and Taiwan Semiconductor Manufacturing Company (TSM) are based elsewhere.
Other major stocks like Samsung, Tencent, Novo Nordisk, and LVMH also hail from international markets and offer a number of different prospects for investors due to the different economic fortunes of their respective regions.
Following significant tech stock sell-offs on Wall Street off the back of weaker-than-expected US labor market data, more market volatility has been forecast for US stocks and shares, which could inspire more investors to look elsewhere for stability and growth opportunities.
Because markets outside of the United States don’t always rise and fall alongside domestic markets, diversifying into international stocks can act as a hedge against market volatility. It can also help to mitigate risk beyond the confines of domestic securities.
However, buying international stocks can be difficult for US residents, so let’s explore some options to enrich your portfolios by bridging the gap between borders:
Foreign Direct Investing
One leading way for investors to buy foreign stocks directly is to open a global account with a domestic broker. In the US leading online brokers like Fidelity, E*TRADE, and Interactive Brokers offer international access to stocks.
Alternatively, investors can open an account with a local broker in their intended country. This means that if you want to access Saudi Aramco shares, it could be worth seeking to open an account with SNB Capital, for instance.
For investors seeking a strategy for how to trade Aramco stock, choosing a reliable institution domestically can provide access to the Saudi Exchange and its rich range of different stocks. However, there can be many additional costs, tax implications, technical support needs, language issues, and currency conversion problems that could make foreign direct investing inefficient.
There’s also a danger that retail investors could be lured into registering with fraudulent brokers that aren’t compliant with local market regulators.
Depositary Receipts Offer a Solution
Depositary Receipts (DRs) and American Depositary Receipts (ADRs) both allow investors to access overseas stocks in a more effective way.
Taking the form of a negotiable financial instrument issued by a bank to represent a foreign company’s publicly traded securities, depositary receipts can trade on local stock exchanges while simultaneously representing an interest in a company that has headquarters outside of the United States.
American Depositary Receipts are negotiable certificates issued by a US bank representing shares in a foreign stock that’s traded on a US exchange. These are denominated in US dollars, with the underlying security held by the respective domestic institution.
Depositary Receipts can either be sponsored or unsponsored, and the sponsor variety can be issued in agreement with the foreign company in question. This allows foreign owners of sponsored DRs the same rights as local stakeholders, such as voting rights.
Utilize Exchange-Traded Funds (ETFs)
One effective way for retail investors to access shares listed overseas is through an investment fund. Exchange-traded funds (ETFs) can help pave the way for foreign investments while also diversifying exposure to a range of assets, which offers a level of stability in the face of a market downturn.
Investment funds can be either actively or passively managed, meaning that investors can use a fund manager to choose a range of investments in an actively managed fund or on a more passive basis through tracker funds, which are more algorithmically operated.
Retaining Saudi Aramco as our example, it’s possible to gain access to the stock through the iShares MSCI Saudi Arabia ETF (KSA), which combines a number of top Saudi Arabian stocks that can be bought into by US investors.
Thanks to AI and the emergence of robo-advisors, it’s becoming easier for retail investors to manage their exposure to investment funds and foreign stocks without having to conduct masses of first-hand market research across different international economies.
However, it’s important to note that these investment strategies come with associated fees that could impact your overall return, so it’s essential to know the charges that you’ll be expected to pay before buying into an ETF, for instance.
Entering Global Markets
For investors seeking to manage their risk, there’s no better way to protect your portfolio than to go global with your stocks and shares.
While there are plenty of ways to access some of the world’s best and brightest stocks, you should always research factors like associated fees, regulatory considerations, taxation implications, and other aspects of different investment strategies that could impact your returns.
As market outlooks continue to become clouded by uncertainty and unexpected data trends, diversifying into international stocks can offer your portfolio some unprecedented resilience. Now, there are more ways than ever to build those all-important bridges beyond borders.
