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A Compilation Of The Best International Equity ETFs

Summary I’m rounding up six of my favorite international equity ETF investments. I’m temporarily bearish on two of them for exposure to H-Shares in Hong Kong. I want international diversification without China. I like VNQI despite a high expense ratio because it is a fairly unique ETF for diversification. My favorite international ETF is SCHF due to the rock-bottom expense ratio. I’ve been holding off on purchases due to correlations on international investments. If China crashes, it may drag down most international investments. That could create an excellent buying opportunity on SCHF. Investors should be seeking at least some international exposure in their portfolio for diversification. To help with that challenge, I rounded up several of the ETFs that I believe offer some of the most compelling alternatives. These options have low expense ratios relative to the sectors they are covering and each is free to trade in at least one brokerage. Given the volatility of international equity markets, I consider a lack of trading costs to be a nice bonus for investors that may want to rebalance frequently. Since I want these assets to be solid targets for rebalancing, I also want strong liquidity so the bid-ask spread will be small. Below is a short list of contenders for the best international ETFs: Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ) Schwab International Equity ETF (NYSEARCA: SCHF ) Schwab Emerging Markets ETF (NYSEARCA: SCHE ) Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) Vanguard Total International Stock ETF (NASDAQ: VXUS ) While I like all of these ETFs for long-term returns due to low expense ratios, I feel some are more compelling than others at the present time. Different Exposure Diversified investments in global real estate are very rare. This is a niche sector, and I like the diversification benefits of including it in a portfolio. If the expense ratio was present on another ETF (.24%), I would find that expense ratio less attractive. However, for this niche market, it is a fairly low expense ratio. Another major factor for me right now is safety. I have been vocal about my bearish assessment of China and that means I prefer international equity with less exposure to China. Comparative Rankings for Emerging Markets In this list, which does not contain a single loser, I would personally put SCHE and VWO at the bottom because I’m not big on emerging markets right now. This is a temporary placement based on my assessment of which countries I want to include in my portfolio. China is being classified as an emerging market and has a heavy weight in these ETFs. That doesn’t mean that they are specifically holding the A-shares for Chinese equities, but I’m not big on the H-shares in Hong Kong either. I expect a crash in the Chinese market to result in dramatic losses of wealth for domestic consumers, and I see that loss of consumer wealth as causing a fundamental problem for sales in the country. Declining sales may drive declining earnings and that would justify lower valuations of the companies regardless of which market is being used to create exposure to businesses in China. If I were bullish on China, I would rank these two ETFs as being extremely attractive. Given my bearish stance, the combination of large positions in China and high correlation between emerging markets during times of stress (again, not the fault of the ETFs) makes me want to underweight emerging markets and severely underweight China. I favor trading shares of SCHE for free trading in a Schwab account. Investors with free trading on VWO should make the exact opposite argument. VNQI The market exposures are concerning me for VNQI, but holdings in China are fairly slow while still offering me a very unique portfolio. Since I want diversification and don’t want China, this is a natural choice for inclusion though I may be heavier on it than I really want to be. It is running around 13% to 14% of my portfolio. International Equity This section is looking at international equity that is not specified as emerging markets. These ETFs should hold more developed markets, and I expect them to be less volatile. I like all three of these ETFs (SCHF, SCHC, and VXUS) as solid options for international exposure, but the high correlation of emerging markets does not end with the other emerging markets. The emerging markets also have a fairly strong correlation to international equities when the markets are stressed. A terrible performance by China could hurt these ETFs because of the correlation even though they have solid holdings in markets that I consider to be more fundamentally sound. I don’t want to give up international equity exposure, and these are some of the best ETFs for gaining it. They all offer expense ratios below .20 and exposure to markets that I think are less risky than the emerging markets. I picked SCHF as my ETF to hold for a couple reasons. While the free trading is nice for making small additions, the ETF also delivers rock-bottom expense ratios for international ETFs. If I decide to make any additions to my international equity exposure, SCHF is the easy choice. SCHC offers some very interesting exposure elements with small-cap equity, but I’m concerned about market stress and correlations. Therefore, I figure small-cap international equity is more risky than large-cap international equity. Conclusion I find all six of the ETFs to be legitimate contenders for best of breed in their respective category. Due to expense ratios and a desire for more developed markets and larger companies, SCHF is the easy choice for my portfolio. The thing that makes me hesitate to buy more shares is not a concern about the fundamentals of the companies being overvalued; it is concerns about correlation to China hurting international returns. To conclude that though, if China crashes and correlation drags down share prices on SCHF, I’ll be one of the investors buying the cheap shares to take advantage of the situation. Disclosure: I am/we are long VNQI SCHF. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

VNQI: International Equity REITs Yielding 3.85%

Summary VNQI is a far better method for international equity than buying ADRs. The Vanguard Global ex-U.S. Real Estate ETF has everything most investors would want. Intense diversification combined with strong yields. Investors need to consider the bid-ask spread when buying into an ETF, even if they are holding it for the long term. Investors need international exposure and in my opinion the best way to get that exposure is through diversified ETFs with very low expense ratios. One of the ETFs that I am personally using for my international exposure is the Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ) and I can tell you from personal experience I like the investment much better than equity investments where the ADRs (American Depositary Receipts) are charging me fees for holding the equity. Previously, those fees could only be deducted from dividends so I made the unwise move of making an equity investment through ADRs that had no dividend. If you want to know more about ADRs, read this article from Charles Schwab . The ADR is awful After the changes to allow agents to collect fees even if the underlying security did not pay a dividend, I found I had the single worst type of “investment”. This is the kind of “investment” that pulls money out of your pocket instead of putting money in. It’s like a negative dividend, and I’m less than thrilled about it. I’ve held onto that stock so I could time the sale for a tax loss and it looks like this year will be the year to do it. Due to how large the tax loss will be, I will be reaping it for years to come. I could sell smaller positions each year rather than carrying the loss across multiple years, but I’m not fond of holding any security with a negative dividend. Vanguard Global ex-U.S. Real Estate ETF is excellent Instead of providing negative cash flows, the Vanguard Global ex-U.S. Real Estate ETF is offering investors a distribution yield of 3.85%. I like the yield, I like the business model of equity REITs, and I like Vanguard as the manager of the fund for a couple reasons. Reason 1: Opaque When an ETF is going to be investing in securities that are even remotely illiquid, I would like to see some opaqueness. Vanguard does not regularly update the holdings of their ETFs and makes it more difficult for investors to know precisely what is inside the ETF. By making it more difficult for institutional investors to know what stocks will be bought and sold by the ETF, Vanguard is able to discourage front-running of their trades. If someone was able to effectively front-run the Vanguard trades, they would make some serious profits and the returns to holders of the Vanguard ETF would be marginally reduced. Even if the reduction is marginal, I don’t want any reduction in my returns. It is extremely rare that I will endorse a strategy that is more opaque, but Vanguard is one of the few companies that earned my respect over the years. It is difficult to earn my respect and very easy to lose it. I’m holding a significant portion of my portfolio in Vanguard ETFs and I trust them to be acting the best interests of the shareholders. Reason 2: Diversification Vanguard Global ex-U.S. Real Estate ETF offers investors excellent diversification through having a total of 632 holdings. Only 23.1% of the value of the ETF was invested in the top ten holdings. Only two countries represent more than 10% of the portfolio, those are Japan at 22.7% and Hong Kong at 10.8%. Reason 3: Correlation My other international investment is the Schwab International Equity ETF (NYSEARCA: SCHF ). In my opinion, SCHF is one of the best international investments available today. I’m adding to my position in SCHF to increase the international exposure of my portfolio. Vanguard Global ex-U.S. Real Estate ETF offers moderately high levels of correlation with the Schwab International Equity ETF. However, most diversified international investments show high correlation to each other. Compared to the level of correlation that I see on other international funds, the correlation for VNQI isn’t too bad. Reason 4: Bid-Ask spread When you’re buying into a position in an ETF, you’re usually stuck paying the spread. If you intend to hold the investment indefinitely, you may only need to cross the spread once. Even if you only cross the spread once, it can be a meaningful reduction in your portfolio value if the spread is significant. As I have been writing this article I checked live updates on the bid and ask for VNQI a couple times. I’ve seen the spread range from $.01 to $.03. Share prices were running around $57, so we are looking at a range of around .02% to .05% being lost to the spread. Over the long term, it is usually assumed that you would lose half the spread going in and half the spread going out. I don’t like selling long term investments with solid dividend yields, so when I buy an ETF I intend to hold it for a long time. If you don’t want the ETF in 2025, why buy it now? Reason 5: I love dividends This ETF is offering solid yields on the portfolio which is the antithesis of the negative yield on ADRs. If an investor is investing for the long term, they would be wise to look at the yield they are buying and focus on acquiring income that is both respectable in volume and highly diversified in nature. That makes VNQI a very reasonable addition to most portfolios. It offers a strong yield to go with heavily diversified holdings. Conclusion When investors need international exposure, VNQI is one of the solid options to do it. There are several factors for the ETF and only a few against it. In my opinion, the biggest drawbacks are the expense ratio and the exposure to China (around 8.28% in China). The expense ratio of .24% is much lower than competitors offering international REIT exposure, but it is also much higher than the expense ratios on any of my other ETFs. Different people build their wealth in different ways. My method was being very frugal with my money. One way that I demonstrate that frugal stance is in limiting my exposure to high expense ratios. I’m not as big on the exposure to China because I think the Chinese economy is in a bubble and I don’t want that bubble in my portfolio. To avoid that bubble, my new holdings for international exposure (outside of dividend reinvestment) will be made in the Schwab International Equity ETF. I’m more comfortable with SCHF’s allocation by country than I am with VNQI. Even though I’m focusing on acquiring more SCHF, I’m going to continue holding my shares in VNQI. I think VNQI is a solid choice for part of the international exposure in the portfolio of a tax advantaged investor. Disclosure: The author is long VNQ, SCHF. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.