Individual investors in the United States have access to a wide selection of investment opportunities. These opportunities include international investments and domestic investments that give investors international exposure, such as U.S.-registered mutual funds that invest in foreign assets and the other examples described below. The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to help educate investors about certain aspects of international investing by describing ways individual investors may obtain information about international investments and investments that offer international exposure — including special issues and risks to consider with these investments.
Should I consider international investments?
Two of the chief reasons individual investors invest in international investments and investments with international exposure are:
- diversification (spreading investment risk among foreign companies and markets in addition to U.S. companies and markets); and
- growth (taking advantage of the potential for growth in some foreign economies, particularly in emerging markets).
Investors should consider various factors when assessing potential investments, whether domestic or international.
International investment returns may move in a different direction, or at a different pace, than U.S. investment returns. In that case, including exposure to both domestic and foreign securities in a portfolio may reduce the risk that an investor will lose money if there is a drop in U.S. investment returns and a portfolio’s overall investment returns over time may have less volatility. Keep in mind, though, that this is not always true and that with globalization, markets are increasingly intertwined across borders. Investors should balance these considerations along with issues and risks unique to international investing, including those described below.
How can I invest internationally?
There are a number of ways individual investors may gain exposure to international investments. As with all investments, investors should first learn as much as they can about an investment before investing.
U.S.-registered mutual funds. There are different kinds of U.S.-registered mutual funds that invest in foreign securities, including: global funds (that invest primarily in foreign companies, but may also invest in U.S. companies); international funds (that invest in companies outside of the United States); regional or country funds (that invest primarily in a particular region or country); or international index funds (that seek to track the results of a particular foreign market or international index). Investing through U.S.-registered mutual funds may reduce some of the potential risks of investing internationally because mutual funds may provide more diversification than most investors could achieve on their own and they are subject to U.S. regulations protecting investors. To learn more about investing in these types of mutual funds, as well as in mutual funds generally, information is available in Mutual Funds and ETFs – A Guide for Investors.
U.S.-registered exchange-traded funds (ETFs). U.S.-registered exchange-traded funds can offer similar benefits as U.S.-registered mutual funds. A share in an ETF that tracks an international index seeks to give an investor exposure to the performance of the underlying international or foreign stock or bond portfolio along with the ability to trade the ETF shares like any other exchange-traded security. An actively managed ETF that invests in non-U.S. assets can also give an investor international exposure along with the same ability to trade the ETF shares like any other exchange-traded security. To learn more about investing in ETFs, information is available in Mutual Funds and ETFs – A Guide for Investors.
American depositary receipts. The stocks of most foreign companies that trade in U.S. markets are traded as American depositary receipts (ADRs). Each ADR represents one or more shares of a foreign stock or a fraction of a share. If investors own an ADR they have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient and cost-effective to own the ADR. The price of an ADR generally corresponds to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares. Investors can purchase ADRs through a U.S. broker. To learn more about investing in ADRs, information is available in Investor Bulletin: American Depositary Receipts.
U.S.-traded foreign stocks. Although most foreign stocks trade in the U.S. markets as ADRs, some foreign companies list their stock directly here as well as in their local market. For example, some Canadian stocks that are listed and trade on Canadian markets are also listed and trade directly in U.S. markets, rather than as ADRs. Some foreign companies list their securities in multiple markets, which may include U.S. markets. Investors can purchase U.S.-listed foreign stocks that trade in the United States through a U.S. broker.
Trading on foreign markets. A U.S. broker may be able to process an order for shares of a company that only trades on a foreign securities market. These foreign companies are not likely to file reports with the SEC. The information available about these companies may be different than the information available about companies that file reports with the SEC. Moreover, the information may not be available in English.
Where can I find information about investing internationally?
Investors should learn as much as they can about an investment, and about a broker-dealer or an investment adviser, before they invest. Tracking down information on international investments may require extra effort, but it will make investors more informed. One of the most important things to remember is to read and understand the information about an investment before investing. Here are some sources of information to consider:
SEC reports. Foreign companies listed on U.S. stock exchanges or that publicly offer their securities in the United States must file reports with the SEC. The SEC requires these foreign companies to file electronically, so their reports are available through the SEC’s EDGAR website at no charge. However, if the company’s securities trade on the over-the-counter markets in the United States rather than on a stock exchange, the company may not be required to file reports with the SEC.
U.S.-registered mutual funds and ETFs. Investors can get the prospectus for a particular U.S.-registered mutual fund or ETF directly from the mutual fund or ETF. Many of these funds also have websites and phone lines to assist investors that may provide helpful information about international investing. In addition, prospectuses of U.S.-registered mutual funds and ETFs are also available through the SEC’s EDGAR website at no charge.
U.S.-registered broker-dealers and investment advisers. A broker or investment adviser may have research reports on particular foreign companies, individual countries or geographic regions. Ask whether updated reports are available on a regular basis. A broker or investment adviser also may be able to provide investors with copies of SEC reports and other information.
Foreign companies. Foreign companies often prepare annual reports, and some companies also publish an English language version of their annual report. Ask a broker for copies of the company’s reports or check to see if they are available from the SEC. Some foreign companies post their annual reports and other financial information on their websites.
Foreign regulators. Investors may be able to learn more about a particular foreign public company by contacting or searching the website of the foreign securities regulator that oversees the markets in which that company’s securities trade. Many foreign securities regulators post information about issuers and registrants on their websites, including audited financial statements. Foreign regulators sometimes post warnings about investment scams and information about their enforcement actions that can be useful to investors.
The International Organization of Securities Commissions (IOSCO) includes a list of foreign securities regulators that are members of IOSCO on its website. IOSCO also publishes investor alerts that it receives from its securities regulator members on the Investor Protection page on its website.
Publications. Many financial publications and international business newspapers provide extensive news coverage of foreign companies and markets.
Internet Resources. Various government, commercial, and media websites offer information about foreign companies and markets. However, as with any investment opportunity, investors should be extremely wary of “hot tips,” overblown statements, and information posted on the Internet from unfamiliar sources. For tips on how to spot and avoid Internet fraud, please visit Investor.gov or the “Investor Information” section of our website.
U.S. investors may already have investments that provide international exposure. In the United States, we have access to information and products from all over the world. Foreign companies can achieve the status of household names in the United States without public awareness that these companies are domiciled outside of the United States, or they may conduct a majority of their business operations abroad. In addition, many U.S. companies are multinational corporations or have substantial foreign operations. Investors should conduct a review of their holdings, including any U.S.-registered mutual funds and ETFs, to determine whether the securities they own or are considering for purchase already provide them with international exposure.
What issues and risks should I consider when investing internationally?
While investing in any security requires careful consideration, international investing raises some special issues and risks. These include:
Access to different information. In some jurisdictions, the information provided by foreign companies is different than information provided by U.S. companies. The nature, amount and frequency of disclosures required under foreign law may also be different from that required of U.S. companies. In addition, foreign companies’ financial statements may be prepared using a different set of accounting standards than companies use in the United States. Information foreign companies publish may not be in English.
Moreover, the financial statements of publicly listed companies in the United States, whether based in the United States or abroad, must be audited by an independent public accounting firm subject to oversight by the Public Company Accounting Oversight Board (PCAOB). The financial statements of a foreign company that is not publicly listed in the United States may or may not be subject to analogous auditing and auditor oversight arrangements.
Costs of international investments. International investing can be more expensive than investing in U.S. companies. In some countries there may be unexpected taxes, such as withholding taxes on dividends. In addition, transaction costs such as fees, broker’s commissions and taxes may be higher than in U.S. markets. Investors also should be aware of the potential risks and effects of currency conversion costs on an investment. U.S.-registered mutual funds and ETFs that invest abroad may have higher fees and expenses than funds and ETFs that invest in U.S. securities, in part because of the extra expense of trading in foreign markets.
Working with a broker or investment adviser. If investors are working with a broker or investment adviser, they should make sure the investment professional is registered with the SEC or (for some investment advisers) with the appropriate state regulatory entity. It is generally against the law for a broker, foreign or domestic, to contact a U.S. investor and solicit an investment unless the broker is registered with the SEC. If U.S. investors directly contact and work with a foreign broker not registered with the SEC, they may not have the same protections as they would if the broker were registered with the SEC and subject to the laws of the United States. Investment advisers advising U.S. persons on investments in securities must register in the U.S. or must be eligible for an exemption to registration.
Details on a U.S.-registered broker’s or investment adviser’s background and qualifications are available on the SEC’s Investment Adviser Public Disclosure (IAPD) website which is also available through the SEC’s website for individual investors, Investor.gov. If investors have any questions about checking the background of an investment professional, they can call the SEC’s toll-free investor assistance line at (800) 732-0330 for help.
Changes in currency exchange rates and currency controls. A foreign investment also has foreign currency exchange risks. When the exchange rate between the foreign currency and the U.S. dollar changes, it can increase or reduce an investment return in a foreign security. In fact, it is possible that a foreign investment may increase in value in its home market but, because of changing exchange rates, the value of that investment in U.S. dollars is actually lower. In addition to exchange rates, investors should be aware that some countries may impose foreign currency controls that restrict or delay investors or the company invested in from moving currency out of a country. These controls could affect the value and liquidity of an investment.
Changes in market value. All securities markets can experience dramatic changes in market value. One way to attempt to reduce the impact of these price changes is to be prepared to hold investments through adverse times and sharp downturns in domestic or foreign markets, which may be long lasting.
Political, economic and social events. Depending on the country or region, it can be more difficult for individual investors to obtain information about and comprehensively analyze all the political, economic and social factors that influence a particular foreign market. These factors may provide diversification from a domestically-focused portfolio, but they may also contribute to the risk of international investing.
Different levels of liquidity. Some foreign markets may have lower trading volumes for securities or fewer listed companies than U.S. markets. Some foreign markets are open for shorter periods than U.S. markets. In addition, some countries may restrict the amount or type of securities that foreign investors may purchase. Where these factors exist, a market may have less liquidity, which may make it more difficult to find a buyer when investors want to sell their securities.
Legal remedies. Where investors purchase a security can affect whether they have, and where they can pursue, legal remedies against the foreign company or any other foreign-based entities involved in a transaction. Investors should be mindful of this when either buying or selling securities on foreign securities exchanges or otherwise outside the United States or entering into securities transactions with parties located outside the United States. In these situations, investors may not have the ability to seek certain legal remedies in U.S. courts as private plaintiffs. Moreover, even if investors sue successfully in a U.S. court, they may not be able to collect on a U.S. judgment against a foreign company, entity or person. Investors may have to rely on legal remedies that are available in the home country, if any.
The SEC’s law enforcement authority with respect to fraudulent conduct protects investors and markets within the United States and protects against fraudulent conduct outside the United States that has a foreseeable substantial effect within the United States. SEC action, however, may or may not lead to the investor receiving funds to redress any fraud. In addition, the SEC may face legal and other obstacles to obtaining information that it would need for investigations or litigation if the information is located in a foreign country.
Investors who would like to provide information about fraud or wrongdoing involving potential violations of the U.S. securities laws may contact the SEC using the SEC’s Tips, Complaints and Referrals Portal.
Different market operations. Foreign markets may operate differently from the major U.S. trading markets. For example, there may be different time periods for clearance and settlement of securities transactions. Some foreign markets may not report securities trades within the same period as U.S. markets. Rules providing for the safekeeping of shares held by foreign custodian banks or depositories may differ from those in the United States. If a foreign custodian has credit problems or fails, shares purchased in a foreign market may have different levels of protection than provided under the laws of the United States.