Investing’s Rosetta Stone
To ensure we are all speaking the same language, here are a few definitions for investing overseas.
A foreign stock is issued by a company headquartered outside the United States. Examples of foreign stocks include Sony (Japan), Nestlé (Switzerland), Volkswagen (Germany), Nokia (Finland), Alibaba (China) and Samsung (Korea).
When most investors talk about foreign stocks, they distinguish between companies based in developed and emerging markets. Developed countries and markets tend to have mature economies with high per capita income levels. For a host of reasons, they have historically been considered less risky than their emerging markets’ cousins. Countries like Germany, the United Kingdom, France, Japan and Australia are all developed markets.
As their name implies, emerging markets are in the earlier stages of economic development. This can mean they have newer capitalist or quasi-capitalist economic systems, more fragile markets that are more susceptible to policy or investor missteps and greater instability—factors that can (and do) add to volatility and risk for investors. China is by far the largest of the emerging economies, and many countries in Southeast Asia, Eastern Europe and Latin America fit the category.
Some investors and portfolio managers further subdivide emerging markets into two groups: The more established emerging economies, such as China and India, and a group of “frontier” markets, such as Vietnam, Nigeria and Peru, in even earlier stages of free-market and investment-market development.
Remember that you’ll often find a handful of foreign stocks in a domestic fund’s portfolio—particularly if it is actively managed. While index funds tend to stay within our borders (unless the index dictates otherwise), many portfolio managers stray beyond U.S. borders as they uncover opportunities.
For example, you’ll find Shopify, the Canadian e-commerce brand, among the 15 largest holdings in U.S. Growth’s (VWUSX) portfolio. Similarly, it’s not unusual to see a U.S. stock or two find its way into a foreign stock fund’s portfolio. Moderna, the biotech responsible for developing one of the COVID vaccines, is a top holding in International Growth (VWIGX). Your portfolio may not be as geographically “pure” as you think.