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The ETF Book: All You Need to Know About Exchange-Traded Funds, Updated Edition by Richard A. Ferri

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CHAPTER 11

Global Equity ETFs

International investing adds a new dimension to an otherwise domestic portfolio. International stocks and bonds can expand the frontier in two ways: They increase the number of securities in a portfolio, which reduces portfolio risk, and they diversify the currencies, which also reduces portfolio risk.

Advantages of Investing Internationally

Equity markets and currencies around the globe often move in different directions at different times. When this occurs, a globally diversified portfolio naturally hedges one market against another. The occasional rebalancing of international investments and domestic investments puts the portfolio back to its original global target allocation.

The process of regular rebalancing between U.S. and international securities historically has lowered overall portfolio risk and inched up portfolio returns over the long term. It has been the nirvana of modern portfolio theory (MPT). There is no guarantee the MPT phenomenon will happen again in the future. Having global diversification, however, should not hurt your portfolio in the long run.

One reason the returns of foreign securities diverge with U.S. securities is due to the underlying native currency movements. International equity exchange-traded funds (ETFs) are quoted in U.S. dollars on U.S. exchanges even though the underlying investment in those funds may have a native currency of something else. For example, Japanese equities are valued in yen and converted to ...

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