Expanding your investments beyond Australia can be a good way to diversify and tap into global opportunities. International exchange-traded funds (ETFs) allow you to do just that by giving you exposure to markets outside the Australian economy.

But with so many options available, how do you know which international ETF is the right fit for you? We’re covering some key factors to consider, so you can confidently choose an international ETF that aligns with your personal goals and investing strategy.

What are international ETFs?

International ETFs track stocks, bonds, or other assets from foreign markets. Unlike domestic ETFs, which focus only on companies or sectors within Australia, international ETFs open the door to investing across borders. Many international ETFs are listed on the ASX , making investing overseas relatively straightforward.

Why bother looking beyond the Australian market? Investing internationally can provide potential benefits such as:

• Diversification : Spreading your investments across different regions reduces your exposure to the economic ups and downs of a single market
• Access to global growth : Some markets outside Australia may offer more dynamic growth opportunities
• Hedging domestic risks : International exposure could protect your portfolio from the effects of local economic or political instability

While these advantages are appealing, choosing the right international ETF isn’t one-size-fits-all. Different funds focus on different regions, industries, and strategies, so it’s important to dig into the details before making your selection.

Factors to consider when choosing an international ETF

Geographic exposure

One of the most important decisions to make when picking an international ETF is deciding which region or country you want exposure to. Some ETFs invest across many countries, while others focus on a specific region or market.

• Global ETFs : These funds provide exposure to a broad range of countries, including both developed and emerging markets
• Region-specific ETFs : These focus on particular areas like Europe, Asia-Pacific, or Latin America
• Country-specific ETFs : These zero in on a single country’s market, such as Japan, Germany, or China

The geographic focus of an ETF can have a big impact on its performance. For instance, emerging markets often present higher growth potential but come with increased risk and volatility. Developed markets, like those in Europe or North America, might offer more stability but with slower growth.

When deciding which region makes sense for you, consider your risk tolerance and where you believe growth opportunities might be strongest.

Sector exposure

In addition to geography, it’s worth considering which sectors the ETF invests in. Some international ETFs are heavily tilted toward specific industries, while others offer broader sector diversification.

• Technology-focused ETFs : Many US-based ETFs have a heavy concentration in tech, given the presence of major companies like Apple and Microsoft
• Resource-heavy ETFs : Emerging market ETFs often focus on industries like natural resources and energy, which are key drivers of their economies

Understanding the sector breakdown of an international ETF helps ensure it aligns with your goals. If you're looking for long-term growth, a tech-heavy ETF might suit you. If you're more focused on stability or dividends , you may prefer an ETF with more exposure to sectors like utilities or healthcare.

Market capitalisation

Another consideration is the size of the companies within the ETF, or its market capitalisation . International ETFs can invest in companies of all sizes, which can affect both risk and potential returns.

• Large-cap ETFs : These funds invest in large, established companies that tend to offer more stability and steady returns
• Mid-cap ETFs : These focus on medium-sized companies that offer a balance between growth potential and risk
• Small-cap ETFs : These invest in smaller companies, which can be more volatile but may also offer higher growth potential

If you’re looking for more predictable performance, large-cap ETFs might be the way to go. But if you're willing to take on more risk for the chance of higher returns, small- or mid-cap ETFs could be worth exploring. Remember, though: no matter what you choose, an element of risk will always be present.

Currency risk

When investing in international markets, currency fluctuations can play a role in your overall returns. Currency risk occurs when the value of a foreign currency rises or falls relative to your home currency, potentially impacting the value of your investment.

• Hedged ETFs : These ETFs aim to reduce currency risk by "hedging" against fluctuations in exchange rates
• Unhedged ETFs : These ETFs do not protect against currency changes, meaning your returns will be influenced by shifts in exchange rates

Hedged ETFs might appeal to those looking to minimise risk, but unhedged ETFs could offer higher returns if the foreign currency strengthens. Consider how much currency risk you're comfortable taking on when deciding between hedged and unhedged funds.

Costs and fees

Fees are an important but often overlooked factor when choosing an ETF . Even small differences in fees can add up over time and impact your long-term returns. The most common fee to watch is the expense ratio, which covers the fund’s operating costs.

• Broadly diversified ETFs : These tend to have lower fees since they often track well-known indexes with significant assets under management
• Niche or region-specific ETFs : These may have higher fees due to the additional complexity of managing more specialised investments.

While lower fees are generally better, it’s important to weigh the cost against the benefits of the fund. You might justify a higher fee if the ETF provides exposure to a particular market or sector that fits your investment goals.

Risk profile and volatility

International ETFs often carry different risks compared to domestic ones. Factors like political stability, economic conditions, and market maturity can all influence how risky an investment might be.

• Political risk : Certain markets may be more prone to political instability, which can affect investor confidence and market performance
• Economic conditions : Emerging markets may offer higher growth potential but are often more vulnerable to economic crises
• Market maturity : Developed markets tend to be more stable but with slower growth compared to emerging markets.

Be aware of the risk factors specific to the region or sectors you’re investing in. If you have a lower risk tolerance, you might prefer to stick to more stable, developed markets. Again, if you're willing to take on more risk in exchange for higher growth potential, emerging markets could be worth considering.

Performance and growth potential

While it’s tempting to look at past performance as an indicator of future results, it’s important to remember that market conditions can change. That said, historical performance can still offer some insight into how a region or sector has performed over time.

• Emerging markets : These areas often show high growth potential but with more ups and downs
• Developed markets : Countries like the US, Japan, or Germany might grow more slowly, but they often offer more consistent returns over time

Keep your investing horizon and goals in mind when looking at performance. If you’re in it for the long haul, you might be more willing to ride out short-term volatility for long-term gains.

Diversification and portfolio fit

Adding international ETFs to your portfolio can help spread out your risk. If your current investments are heavily concentrated in the Australian market, international ETFs can provide exposure to different regions, industries, and currencies, helping you balance your portfolio .

For instance, if your portfolio is already tech-heavy, you might want to explore international ETFs focused on sectors like healthcare or energy to diversify your holdings . On the other hand, if you’re light on foreign exposure, a globally diversified ETF could provide the broad coverage you need.

Examples of popular international ETFs

Here are a few well-known international ETFs that reflect different approaches to global investing:

• Vanguard MSCI Index International Shares ETF (VGS) : Offers broad exposure to developed markets globally
• iShares S&P 500 ETF (IVV) : Focuses on the top 500 companies in the US
• iShares MSCI Emerging Markets ETF (IEM) : Includes emerging markets around the world

These examples shouldn’t be taken as recommendations. Instead, they illustrate how international ETFs can differ in their geographic focus, sector allocations, and fee structures. It’s important to dig into these details to find the one that aligns with your strategy.

How to align an international ETF with your investing goals

At the end of the day, the right international ETF for you depends on your individual goals and risk tolerance. Whether you’re looking for growth, income, or diversification, it’s important to ensure that the ETF you choose fits into your broader investing strategy .

If you’re ever unsure of how to integrate international ETFs into your investing strategy, consider reaching out to a licensed financial adviser for help.

Happy investing!