If you are interested in investing outside the U.S., how should you proceed? You can choose among hundreds of mutual funds. Mutual funds investing outside the U.S. may be divided into two categories:
International funds. These hold only foreign stocks. They offer a pure play on non-U.S. stocks.
Global funds. These may hold U.S. stocks as well. Thus, they’re more flexible than international funds.
In addition to regular mutual funds, closed-end funds are another possibility if you want to invest in foreign stocks. Closed-end funds trade like stocks and they often sell at a discount to the underlying value of their holdings. Closed-end funds include many single-country funds. Indeed, there are so many closed-end country funds that you can put together a diversified portfolio.
Yet another option for international investing is to buy American Depositary Receipts (ADRs), which resemble common stocks. You can pick your own stocks, selecting among the largest foreign companies, through ADRs. If you select well you can hold onto your ADRs and enjoy untaxed appreciation until you decide to sell, at favorable long-term capital gains rates.
U.S. banks hold foreign shares in custody and issue ADRs, each of which represents one share (or a specified number of shares) of the underlying foreign stock. About 2,000 foreign stocks from dozens of countries trade as ADRs; Citibank, J.P. Morgan and the Bank of New York are the leading issuers. After they’re issued, ADRs trade just like U.S. stocks, on the leading exchanges or over-the-counter. All transactions are handled in U.S. dollars. You collect dividends, if they’re paid, and you can sell whenever you wish. In essence, with ADRs you can control your investments while you avoid the hassles of trading foreign stocks. You can research ADRs on the Internet as well as you can research U.S. stocks. If you limit yourself to U.S. companies you may be missing out on some of the world’s best investments.
