why invest in foreign stocks: global diversification guide

Why invest in foreign stocks

Why invest in foreign stocks is a common question for investors seeking broader diversification, exposure to different growth drivers, and valuation opportunities outside their home market. This article explains what "foreign" or "international" stocks are, why U.S. investors consider adding them, the benefits and risks, and practical ways to include international equities in a portfolio.

Definition and scope

Foreign stocks, or international equities, are shares issued by companies domiciled outside an investor's home country. For U.S. investors this typically means non‑U.S. companies listed on foreign exchanges or represented via American Depositary Receipts (ADRs) or Global Depositary Receipts (GDRs).

Key distinctions:

• Developed vs emerging markets: Developed markets (e.g., major European, Japanese markets) generally offer higher regulatory transparency and established market infrastructure. Emerging markets (e.g., many countries in Asia, Latin America, Africa) can offer faster economic growth but often higher political and market risk.
• ADRs and GDRs: Depositary receipts allow foreign issuers to list on U.S. exchanges and trade in U.S. dollars, simplifying access for U.S. investors.
• Global vs international: "Global" can include the investor's home market and other countries; "international" often means excluding the home market (e.g., international = non‑U.S. for U.S. investors).
• Country vs region exposure: Investors can target single countries (e.g., Japan), broad regions (e.g., Europe ex‑UK), or multi‑country baskets (e.g., MSCI Emerging Markets).

Scope of this guide: Focused on equity investments outside an investor's home country, including direct shares, ADRs/GDRs, mutual funds, ETFs, region/country funds, and thematic vehicles.

Historical context and recent market trends

Over long windows, U.S. equities have frequently outperformed many international markets, driven in part by large-cap U.S. technology and communication firms. However, past performance has not been monotonic: there have been extended periods when international or emerging‑market stocks led global returns.

As of 2026-01-01, according to commentary from Charles Schwab and Fidelity, market rotations in 2024–2025 saw renewed investor interest in international equities after multi‑year U.S. leadership. These rotations were influenced by relative valuations, sector composition differences, and movements in the U.S. dollar.

Historically notable periods:

• Early 2000s and mid‑2000s: Emerging markets contributed materially to global gains during commodity and growth cycles.
• 2009–2013: Recovery after the Global Financial Crisis produced mixed leadership across regions.
• 2017–2021: U.S. large‑cap growth (particularly technology) led returns, increasing home‑market concentration.
• 2024–2025: Many institutional commentators (e.g., Lazard, J.P. Morgan) observed tactical opportunities outside the U.S. as valuation gaps narrowed and global growth differentials shifted.

These patterns underscore that international markets can lead or lag over multi‑year windows; the decision to allocate should consider long‑term objectives rather than short‑term performance chasing.

Key reasons to invest in foreign stocks

Diversification benefits

why invest in foreign stocks is often answered first with diversification. International stocks can reduce geographic concentration risk because economies and markets do not move perfectly in sync. Correlations between the U.S. market and many foreign markets are less than one, so adding international exposure can lower portfolio volatility and improve risk‑adjusted returns over time.

Portfolio theory suggests that combining assets with imperfect correlation smooths returns and may raise expected returns per unit of risk. For example, country‑specific shocks that hit domestic companies may have limited impact on foreign earnings.

Access to a broader investable universe and sector profiles

why invest in foreign stocks also gives access to companies and industries underrepresented in U.S. indices. Financials, industrials, natural resources, and commodity producers tend to have larger weightings in many non‑U.S. markets. Investors seeking exposure to specific sectors (e.g., European banks, Australian miners, Japanese industrials) can find holdings not readily available in U.S. large‑cap benchmarks.

This broader universe supports thematic and sector tilts that may complement domestic holdings.

Valuation opportunities

One practical reason investors ask why invest in foreign stocks is the potential for valuation gaps. International equities, on average and at times, trade at lower price‑to‑earnings (P/E) multiples and offer higher dividend yields than many U.S. large‑cap benchmarks. Where valuations diverge materially, there is potential for relative outperformance if mean reversion occurs.

Valuation-based allocation can be tactical (short‑term tilts) or strategic (maintaining a permanent allocation to capture long‑run reversion).

Exposure to higher‑growth economies

why invest in foreign stocks when growth differentials exist? Emerging markets may offer higher expected earnings growth driven by demographics, urbanization, capital formation, and industrialization. Region‑specific secular trends—such as rising domestic consumption in parts of Asia—can produce company earnings growth not available domestically.

Higher growth often comes with higher volatility, so this exposure should align with risk tolerance and investment horizon.

Currency effects and potential returns

why invest in foreign stocks includes recognizing currency as an active return component. When the investor's home currency weakens versus the foreign currency, U.S. dollar returns of foreign equities receive a boost; when the home currency strengthens, returns are reduced. Currency movements can therefore augment or detract from equity returns and can be managed (or left unhedged) depending on investor view and vehicle used.

Currency can serve as diversification itself: foreign currency exposure may act as a hedge against domestic inflation or policy shifts.

Reduced reliance on home‑country economic performance

A portfolio heavily concentrated in domestic equities is tied closely to the home nation's GDP, regulatory environment, and political cycle. Adding international equities reduces single‑country risk and helps investors avoid being fully exposed to domestic downturns.

Risks and potential disadvantages

Currency risk and volatility

Currency fluctuations can significantly change realized returns. Translation risk affects reported U.S. dollar returns for foreign equities. Even if a foreign company performs well in local terms, adverse currency moves can erase those gains for U.S. investors.

Investors must decide whether to accept currency exposure, hedge it (e.g., via currency‑hedged ETFs or forward contracts), or manage it passively.

Political, regulatory and country risk

Foreign investments include risks such as changes in taxation, expropriation, capital controls, or sudden regulatory shifts. Emerging markets in particular can face abrupt policy changes that affect corporate earnings and capital flows.

Market structure, liquidity and trading friction

Some foreign stocks trade on less liquid markets, with wider bid‑ask spreads and lower daily volumes than comparable U.S. securities. Trading hours, settlement cycles, and clearing rules may differ and can complicate execution and short‑term trading strategies.

Accounting, transparency and corporate governance differences

Reporting standards and enforcement vary across jurisdictions. Differences in accounting, disclosure practices, minority shareholder protections, and board structures can complicate company analysis and increase governance risk.

Tax and withholding considerations

Dividends and other distributions from foreign stocks may be subject to withholding taxes by the issuer's country. U.S. investors may be eligible for foreign tax credits but must manage documentation (for example, appropriate tax forms) and understand treaty provisions.

How to invest in foreign stocks

American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs)

ADRs and GDRs let U.S. investors buy foreign company exposure on U.S. exchanges in dollars. They simplify custody, clearing, and settlement, and often make dividend processing and tax reporting easier. However, ADRs may not perfectly mirror local‑listed shares (differences can exist in liquidity and fees).

Pros: dollar pricing, U.S. exchange trading hours, easier tax reporting. Cons: potential fees, limited issuance for some companies, and possible liquidity gaps relative to local listings.

International mutual funds and ETFs

Mutual funds and ETFs provide diversified exposure across countries and regions. Passive ETFs tracking indexes (MSCI EAFE, MSCI Emerging Markets, FTSE) offer low‑cost access, while active funds aim for outperformance through selection and country/sector tilts.

• Passive vs active: Passive funds offer broad exposure and low costs; active funds may exploit valuation or inefficiency opportunities but charge higher fees and entail manager risk.
• Regional and country ETFs: Provide targeted exposure (e.g., Japan, Europe, Latin America).

ETFs are a common route for U.S. investors seeking simplicity and intraday tradability.

Direct foreign market access

Buying shares on foreign exchanges offers the most direct ownership of local‑listed shares. This route may require brokers with international trading capabilities, may involve different currency denominations, and often incurs higher fees and more complex settlement.

Constraints include minimum account requirements, foreign exchange management, and potentially increased paperwork.

Thematic and sector funds

Thematic funds target specific global trends or sectors (e.g., Asia tech, emerging‑market financials, clean energy). They can complement broad country or regional allocations when investors have high conviction in a secular theme.

Portfolio allocation and strategy considerations

How much to allocate

There is no single correct answer to how much to allocate, but common frameworks include:

• Strategic allocation: A long‑term target percentage (e.g., 20%–40% international) based on risk tolerance, desire for diversification, and home bias considerations.
• Tactical tilts: Shorter‑term adjustments based on valuation, macro outlook, or currency views.

Factors to set allocation: home bias, risk tolerance, investment horizon, and objectives (growth vs income).

Rebalancing and correlation management

Regular rebalancing can lock in gains from outperforming regions and replenish exposure to underperformers at lower valuations. Because international exposure can lower correlations, it can change portfolio volatility and the frequency at which rebalancing triggers.

Passive vs active approaches

Indexing broad international markets provides low cost and diversification. Active management seeks to exploit inefficiencies, valuation gaps, and bottom‑up company selection. For international exposure, active managers may add value in less efficient emerging markets, but fees and manager selection are important considerations.

Due diligence and selection criteria

Country and macro analysis

Assess macro fundamentals: GDP growth, fiscal and monetary policy, current account and external debt positions, inflation trends, and political stability. Country risk assessment helps determine whether macro conditions support corporate earnings growth.

Company and sector fundamentals

Perform bottom‑up analysis of profitability, cash flows, balance sheet strength, and governance. Compare valuations (P/E, P/B), dividend yields, and earnings quality across comparable companies and regions.

Fund/ETF metrics and tracking

When choosing funds or ETFs, evaluate:

• Expense ratio and fee structure
• Tracking error and replication method (physical vs synthetic replication)
• Domicile and tax treatment
• Liquidity and average daily trading volume
• Fund size and turnover

These metrics affect after‑cost returns and operational convenience.

Practical, operational and cost issues

Trading hours, settlement cycles and market holidays

Different time zones mean some markets are open while investors in the U.S. sleep. This impacts order execution and real‑time price discovery. Settlement cycles can vary (e.g., T+2 or T+3) and affect funding and operational timing. Local market holidays may also temporarily reduce liquidity.

Fees, custody and currency conversion costs

Broker fees, FX spreads, and custody charges can erode returns. When buying foreign shares directly you typically pay for currency conversion; many funds and ADRs bundle FX costs into their pricing.

Tax documentation and withholding reclaim procedures

U.S. investors holding foreign securities should be familiar with documentation such as the W‑8BEN for withholding tax purposes. Some countries allow partial reclaim of withholding taxes under tax treaties, but reclaim processes can be time consuming and sometimes require local tax filings.

As of 2026-01-01, the SEC International Investing bulletin remains a recommended resource for U.S. investors to understand cross‑border tax and regulatory considerations.

Performance drivers and empirical evidence

Historical returns and rolling‑period comparisons

Empirical evidence shows that no single market leads all the time. Over rolling periods, international or emerging markets have outperformed the U.S. during many multi‑year windows. Conversely, the U.S. has led during other extended cycles. This variability is why many asset allocators maintain diversified global exposures.

Valuation and cycle effects

Relative performance often tracks valuation gaps, sector composition, and macro cycles. When international markets trade at lower relative valuations, historical tendencies toward mean reversion can create opportunities, though timing is uncertain.

When foreign stocks may be especially attractive

Scenarios when investors commonly consider why invest in foreign stocks:

• Relative valuations: international equities trading significantly below U.S. peers on normalized metrics.
• Dollar weakness: a declining U.S. dollar can enhance dollar returns from foreign holdings.
• Region‑specific stimulus or reform: fiscal stimulus, opening of capital markets, or corporate governance reforms that improve investment environments.
• High domestic concentration: when home markets are highly concentrated in a few sectors, international stocks can provide balance.

As of 2026-01-01, several asset managers (including Vanguard and J.P. Morgan) commented that valuation and sector diversification were driving renewed allocation discussions for institutional clients.

Common investor mistakes and behavioral biases

Home country bias

Investors frequently overweight domestic equities, known as home country bias. This can reduce diversification and leave portfolios vulnerable to country‑specific shocks. Recognizing and correcting home bias is a common step toward more resilient portfolios.

Overtrading, chasing short‑term performance, and ignoring costs

Rotating into recent winners or frequently trading international exposures can generate high costs and poor timing. Ignoring fees, spreads, and tax implications reduces net returns.

Examples and case studies

• 2000s emerging market run: Emerging markets outperformed in the commodity‑led growth years of the 2000s.
• 2010s rotations: Various multi‑year periods saw Europe or Japan leading as valuations and sector cycles shifted.
• 2024–2025 international upswings: As of 2026-01-01, market commentary from Fidelity and Lazard highlighted rotations into international equities driven by valuation repricing and easing of certain macro headwinds. These shifts reinforced that international exposure can lead during specific multi‑year windows.

Note to editors: empirical returns and index figures referenced here should be updated with current index data and time stamps for accuracy.

Regulatory and investor protections

Investor protections differ by jurisdiction. The U.S. SEC provides guidance for investing internationally (see the SEC International Investing bulletin). For U.S. investors, ADRs and U.S‑listed ETFs often offer familiar regulatory frameworks, while direct foreign listings may involve different investor protections and dispute resolution mechanisms.

Tools and resources

Indexes and benchmarks commonly used for international exposure:

• MSCI EAFE (developed markets excluding U.S. and Canada)
• MSCI Emerging Markets
• FTSE regional and country indices

Major fund providers and platforms commonly used by U.S. investors include Vanguard, Charles Schwab, and Fidelity for fund research and execution. For crypto/Web3 wallet needs when managing tokenized or on‑chain assets, Bitget Wallet is a recommended solution in the Bitget ecosystem.

Research: country risk reports, fund prospectuses, SEC filings, and provider commentaries from the prioritized sources (Vanguard, Fidelity, Schwab, Lazard, J.P. Morgan) are primary inputs for due diligence.

Practical checklist for U.S. investors

• Clarify objective: diversification, growth, income, or specific thematic exposure.
• Determine target allocation: strategic vs tactical percentage for international equity.
• Choose vehicle: ADRs/GDRs, international mutual funds, ETFs (passive or active), or direct foreign shares.
• Review costs: expense ratios, trading commissions, FX spreads, custody fees.
• Assess taxes: withholding rates, W‑8BEN completion, and foreign tax credit implications.
• Decide on currency strategy: hedged vs unhedged exposure.
• Rebalancing plan: frequency and triggers for bringing allocation back to target.
• Document due diligence: country macro view, corporate governance, fund tracking and liquidity metrics.

See also

• Global asset allocation
• Currency hedging
• American Depositary Receipts (ADRs)
• Emerging‑market investing
• International ETFs

References

Sources prioritized for this guide and further reading:

• Charles Schwab (market commentary and investor education)
• Vanguard (indexing and global allocation perspectives)
• Fidelity (research on rotations and international valuations)
• Lazard (global market commentary)
• Dodge & Cox (active international equity perspectives)
• J.P. Morgan (global market strategy reports)
• Hartford Funds (international fund insights)
• Wealthfront and Optimized Portfolio (allocation frameworks)
• U.S. Securities and Exchange Commission — Investor Bulletin on International Investing

As of 2026-01-01, the above providers had published market commentaries noting shifts in 2024–2025 that renewed institutional interest in non‑U.S. equities. Specific index returns and tax rates should be verified with up‑to‑date provider publications and official tax guidance.

Further exploration: review fund prospectuses, provider research, and the SEC investor bulletin before implementing changes. For traders and custody of digital assets related to global strategies, consider Bitget services and Bitget Wallet for integrated solutions.