How to diversify your portfolio with international ETFs? – 01/25/2022 at 11:07

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In addition to the developed economies, the choice of investment is wide in emerging countries whose weight on the world stage is only growing with often greater performance potential. Be careful, this always goes hand in hand with a higher level of financial risk as well. (photo: BlackRock)

Why diversify your portfolio across geographies?

As an investor, we often tend to choose investments that cover the countries or geographical areas with which we are familiar. This is an excellent reflex because it is essential to invest in investments that we understand and whose context we know how to grasp. But it can be beneficial for the portfolio to broaden its exposure across borders.

Let’s take 3 countries and their stock market performance over the last few years, marked by the pandemic:

  • France : in 2020, the CAC 40 index, which is made up of the 40 largest French companies, posted a negative performance of -5.15%. On the other hand, it ended the following year, 2021, at an all-time high with a gain of almost 29%.
  • United States : the index representing the biggest American companies S&P500 posted a performance of +16% in 2020, and a second jump in growth during 2021 to post a gain of around 29% over the year.
  • China: the MSCI China index representing the largest Chinese companies posted +25% performance in 2020, only to reverse the following year and end up at the end of December 2021, almost at its level at the start of 2020.

Thus, the current context reminds us that economies do not all have the same growth potential and react differently to global crises.

But how to choose the most dynamic geographical area?

For an investor, even the most knowledgeable professional investors, it is not easy to make the right choices at all times, for lack of a crystal ball that would predict future performance.

Read also : How to diversify your portfolio with sector ETFs?

Diversification, one of the key principles of investing, which means “not putting all your eggs in one basket”, allows you to capture performance on stock markets around the world, without exposing your portfolio entirely to risk of underperformance of a specific area.

How useful are ETFs for international diversification?

First, the important choice

ETFs replicate the performance of indices, such as the CAC 40, the S&P 500 or the MSCI China mentioned above. There are a large number of indices and the offer continues to expand across geographies but also sectors or asset classes. As such, ETFs offer a great choice for those who wish to expose their portfolio across international markets. Other known indices for the Euro zone are the Euro Stoxx, the DAX for those betting on the growth of the German economy or the Nikkei which replicates the stock market performance of the largest Japanese companies.

In addition to developed economies, there is also a wide choice of emerging countries whose weight on the world stage is only growing, and thus provides an additional source of diversification for investors looking for exoticism, and above all performance potential. more important than these developing countries present – ​​beware, which always goes hand in hand with a higher level of financial risk as well.

Second, their ability to reduce the risk

An ETF in itself already offers a certain diversification since it allows the investor to be exposed to a basket of securities, those which constitute the underlying index. By buying one or more units of an ETF, the investor spreads his risk over several tens or often several hundred securities, depending on the index.

Although global stock markets are teeming with investment opportunities, selecting individual companies, especially beyond one’s home market, can be tricky – the danger would be exposure to companies with poor management or poor financial health due to lack of knowledge. ETFs thus make it possible to mitigate the risk inherent in a single company, especially if you are not yet very familiar with a certain geographical area.

Third, their low costs

ETFs are an accessible way to invest, because thanks to their index-based approach, ie replication, there is no active stock picking on the part of the manager. This allows these investments to have low management fees. For example, investing in the US equity market with the iShares range through an ETF replicating the S&P 500 is possible for 0.07% management fees.

Also, the unit entry amounts are often low, from around twenty euros in general you can already acquire an ETF share. This aspect of low cost means that with a given amount limited at the start, an investor can be exposed to a variety of asset classes, geographies or even sectors.

In summary, the ease of acquisition, the large offer and the low costs of ETFs allow investors to access the geographies that meet their interests and convictions, without having to limit themselves to a single area and thus be able to vary the pleasures – which for a portfolio means investing according to your choices while respecting the principle of diversification. Find the full range of Ishares ETFs

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