Investing in international stocks gives your portfolio exposure to the economies, companies, and growth opportunities that exist outside the United States. While US stocks have dominated global returns for much of the past decade, diversifying internationally reduces concentration risk and positions you to benefit when non-US markets outperform. Here is a practical guide to international investing in 2026.
Why Invest in International Stocks?
The US represents roughly 60% of global stock market capitalization. That means 40% of the world’s publicly traded wealth is in international companies. Limiting yourself only to US stocks means ignoring a significant portion of global economic activity.
Key reasons to invest internationally include:
- Diversification: different economies do not always move in sync. When US stocks underperform, international stocks sometimes outperform, smoothing portfolio volatility.
- Valuation: international stocks often trade at lower valuations than US stocks. Emerging markets in particular have historically offered high long-term growth potential.
- Currency exposure: a weaker US dollar boosts returns from international investments held in foreign currencies.
- Global growth: some of the fastest-growing economies — India, Southeast Asia, parts of Africa — are represented more in international indices than in US indices.
Types of International Markets
Developed Markets
Developed markets are established economies with mature financial systems, strong regulatory frameworks, and stable currencies. Examples include the United Kingdom, Japan, Germany, France, Canada, Australia, and Switzerland. The MSCI EAFE Index (Europe, Australasia, Far East) is the most commonly referenced benchmark for developed international markets.
Emerging Markets
Emerging markets are countries with rapidly growing economies but less mature financial systems. Major emerging markets include China, India, Brazil, South Korea, Taiwan, and Mexico. These markets offer higher potential growth but also higher volatility and political risk. The MSCI Emerging Markets Index tracks these countries.
Frontier Markets
Frontier markets are even earlier-stage economies — Vietnam, Nigeria, Bangladesh, Kenya. They offer the highest potential growth and the highest risk. Most retail investors access these only through specialized frontier market funds.
Ways to Invest in International Stocks
International ETFs and Index Funds
The simplest and most cost-effective way to invest internationally is through ETFs or mutual funds that track international indices. Popular options include:
- Vanguard Total International Stock ETF (VXUS): covers the entire world outside the US, including both developed and emerging markets. Expense ratio approximately 0.07%.
- iShares MSCI EAFE ETF (EFA): tracks developed markets in Europe, Australasia, and the Far East.
- Vanguard FTSE Emerging Markets ETF (VWO): focuses on emerging market stocks.
- iShares MSCI Emerging Markets ETF (EEM): another major emerging markets ETF with higher trading volume.
- iShares MSCI World ETF (URTH): covers global developed market stocks including the US.
American Depositary Receipts (ADRs)
ADRs are certificates issued by US banks that represent shares of foreign companies. They trade on US exchanges in US dollars, making it easy to buy individual foreign stocks without opening a foreign brokerage account. Large international companies like Nestle, Toyota, Samsung, ASML, and Shell all trade as ADRs on US exchanges.
ADRs are convenient but come with fees — the depositary bank charges an annual depositary fee, typically a few cents per share per year.
Global Depositary Receipts (GDRs)
Similar to ADRs but traded on non-US exchanges like the London Stock Exchange. GDRs are used more commonly by institutional investors and are less accessible to US retail investors.
Direct Foreign Stock Purchases
Some brokerages allow you to open a foreign brokerage account or trade directly on foreign exchanges. Interactive Brokers is the most well-known retail platform that supports trading on dozens of international exchanges. This gives you access to companies not available as ADRs but involves currency conversion, foreign tax considerations, and more complexity.
Currency Risk Explained
When you invest in a foreign stock or fund, your returns are affected both by how the stock performs and by how the currency moves relative to the US dollar.
Example: You invest in a Japanese ETF. Japanese stocks rise 10% in yen terms. But if the yen weakens 5% against the dollar during the same period, your actual return in USD terms is only about 5%.
Conversely, if the yen strengthens against the dollar, your returns are amplified beyond what the stock market alone produced.
Some international ETFs offer currency-hedged versions (for example, iShares MSCI EAFE Hedged Equity ETF — HEFA) that remove currency fluctuation from the equation. Hedged funds typically cost slightly more in expense ratio and make more sense when the US dollar is expected to strengthen.
Tax Considerations
Foreign Tax Credit
Many foreign countries withhold a percentage of dividends paid to US investors. For example, Switzerland withholds 35% of dividends from Swiss companies. Germany withholds 26.375%. These foreign taxes can often be reclaimed through a US tax credit (Form 1116) or credited on Form 1099-DIV if you hold the investment in a taxable account.
Note: foreign tax credits do not apply in tax-advantaged accounts like IRAs or 401(k)s. You simply lose those withheld taxes.
PFIC Rules
Passive Foreign Investment Companies (PFICs) include many foreign mutual funds and ETFs not registered in the US. Holding PFICs can create very unfavorable US tax treatment. Stick to US-listed ETFs (like Vanguard and iShares international ETFs) to avoid PFIC issues.
How Much to Allocate Internationally?
There is no single right answer. Common approaches include:
- Market-cap weighting: roughly 40% of a total world portfolio is international. Vanguard and other large asset managers use this approach.
- 20-30% international: a moderate allocation that provides diversification without fully abandoning US market dominance.
- US-heavy with selective international: some investors maintain 80-90% US stocks and add specific international exposures (for example, dedicated India ETF or European value ETF) where they see opportunities.
The right allocation depends on your risk tolerance, time horizon, and views on global economic trends. Most diversified target-date funds automatically hold international stocks in the 20-40% range.
Country-Specific and Regional ETFs
Beyond broad international funds, you can invest in specific countries or regions:
- iShares MSCI India ETF (INDA): India, one of the fastest-growing major economies
- iShares China Large-Cap ETF (FXI): large Chinese companies
- iShares Europe ETF (IEV): European stocks
- VanEck Vietnam ETF (VNM): Vietnam, a growing emerging market
- iShares Latin America 40 ETF (ILF): major Latin American companies
Country-specific ETFs carry higher concentration risk but allow you to make targeted bets on specific economies.
Risks of International Investing
- Political risk: elections, regulatory changes, or government actions can significantly impact individual countries or sectors.
- Currency risk: as discussed, currency moves can meaningfully alter returns.
- Less transparency: accounting standards, disclosure requirements, and shareholder protections vary widely outside the US.
- Liquidity: smaller markets may have wider bid-ask spreads and lower trading volume.
- Geopolitical events: trade disputes, sanctions, or conflicts can rapidly impact international portfolios.
Final Thoughts
International investing does not require complex strategies. For most investors, adding a broad international ETF like VXUS or VXUS alongside a US equity ETF is sufficient to achieve meaningful global diversification. Start with a broad exposure, understand the currency and tax dynamics, and scale from there based on your confidence and interest in specific markets. A globally diversified portfolio is one of the most effective ways to manage long-term investment risk while participating in worldwide economic growth.