A Framework for International Investing

Christopher Dhanraj |Mar 20, 2019

Key points

  • Investors should consider international investing for potential diversification gains, and access to growth and potential returns.
  • Investors should be aware of country risks while investing internationally. One way to manage those risks, and seek potential gains is through a core satellite approach, with a broad exposure (core) and more tailored exposures of countries (satellites).
  • Countries can be used to manage strategic core exposures, mitigate currency risk, implement macro themes, or manage political risks.
  • Country exchanged traded funds (ETFs) can be used to implement these strategies in a precise, low cost and efficient manner.

Why invest internationally?

Investors often prefer to stay at home when it comes to investing. They typically focus on domestic stocks in their equity portfolios and limit international stocks, a phenomenon known as “home country bias.” However, international investing offers two major benefits:

Diversification. Historically, U.S. and international stocks have gone through periods where one region outperforms the others. Combining assets that don’t move in lockstep can lead to a reduction in volatility – i.e. risk – in the portfolio for the long run.

U.S. and international stocks have gone through cycles of relative outperformance

Graph U.S. and international stocks have gone through cycles of relative outperformance.

Source: Thomson Reuters, as of 12/31/18. U.S. stocks represented by the S&P 500 TR; Int’l Developed stocks represented by MSCI EAFE + Canada Index (gross); Emerging Market stocks represented by MSCI Emerging Markets Index (gross). Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Access to growth. International economies – both developed and emerging – may offer faster rates of economic growth than the United States. For example, in emerging markets, a growing middle class and developing infrastructure can help generate wealth and dynamic companies with significant growth potential. And developed countries are already home to many world-class companies.

Against that backdrop, investors have a range of ways to invest internationally. One option is a broad, index exposure for non-U.S. regions. That may be appropriate for many investors, but it does come with drawbacks, specifically a large allocation to a few large countries, which can increase risk.

Consider that nearly 50% of a global, market cap-weighted equity portfolio is concentrated across just a handful of countries ex-U.S.1 In other words, investors in broad indexes have already made country allocation decisions, even if unknowingly.

The following discusses ways to mitigate that risk or potentially boost returns by investing in countries as part of a core satellite strategy, which can be implemented using ETFs.

Country investing in practice: Core-satellite

Many investors balance regional and country exposures in a core-satellite framework. This anchors portfolio outcomes around long-term objectives with a broad exposure (core) while enabling the flexibility to adjust to current market conditions with country investing (satellite), just as many investors do with sectors. Each portion can be tailored in a number of ways:

Managing strategic core exposures. As noted, a non-U.S. allocation in a broad benchmark typically has significant concentration in just a few countries such as Japan, the U.K., and China. Allocation changes to these countries, typically as a result of views on macroeconomic events, regime changes or other trends, can have a significant impact on risk and return. 

For example, investors may separate a broad allocation to non-U.S. developed markets into Europe and Japan to express different currency views, or divide eurozone and U.K. exposures. The slow-moving, structural nature of a core allocation suggests changes to allocations should only reflect long-term and/or significant macro developments.

Structural shocks can increase country opportunities

Graph Structural shocks can increase country opportunities, 2013-2019.
Graph Structural shocks can increase country opportunities, January 2016-January 2019.

Source: Thomson Reuters, as of February 1, 2019. Index performance measured in U.S. dollars and rebased to 100. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Managing currency exposures. The currency risk in international investing can be significant. For U.S. investors, a currency’s strength or weakness versus the dollar can either amplify or dampen returns from that country. Currency hedged products can mitigate that risk, but investors should be cautious, because currency exposure can actually add diversification properties in a portfolio in some instances.

Implementing macro themes. With a core-satellite approach, tactical macroeconomic or relative value views are typically expressed in the satellite allocation. These can include commodity cycles, U.S. dollar cycles, and regional growth dynamics; understanding how they affect individual countries is key.

With respect to commodities, for example, a tilt towards commodity producing countries can potentially boost returns when commodity prices are high (or vice versa). The Figure below shows the excess return, relative to the MSCI All Country World Index, from implementing a commodity tilt with six countries with economically and statistically significant exposure to commodity prices. Note the commodity tilt very closely tracks commodity prices and the excess return of a country has been higher historically than the underlying commodity exposure itself.

Expressing commodity views through countries

Expressing commodity views through countries.

Source: BlackRock, Thomson Reuters. As of December 2018. The chart shows the S&P GSCI Total Return Index, S&P GSCI Spot Index, and average excess return of six commodity producing countries relative to the MSCI All Country World Index (ACWI) in U.S. dollar terms. The six commodity producing countries are Australia, Brazil, Canada, Norway, Peru, and Russia and are measured using their respective MSCI country indices. Past performance is not a reliable indicator of future results. It is not possible to invest directly in an index.

Managing political event risk. Geopolitical events are another area where investors can manage risks or exploit potential opportunities in countries. For example, elections are frequently a focal point for emerging market investors as policy swings, economic reforms, and changing sentiment play an outsized role compared to developed markets. Naturally, there is a great deal of uncertainty ahead of elections. Such patterns create risks, but also opportunities by tactical tilts, hedging the FX exposure, or some combination thereof.


Managing country and FX exposures is central to international investing. From improving diversification to implementing tactical views, managing country exposures can be an effective tool in managing risk and return.

In this effort, country ETFs can be a powerful tool. The precision exposure offered by country ETFs enables a tremendous flexibility in the range of applications and level of sophistication.