Why I’ve Stopped Investing in International Index Funds
I don’t buy many international index funds. In fact, I’ve completely halted all investing into them—and I have my reasons. While many financial advisors or traditional models suggest including international exposure in your portfolio, I’m not convinced it’s necessary.
To be clear, this is now what I think you should do. This is what I do. I am willing to take on the potential added risk. Do your own research and trust your risk tolerance when creating or adjusting an asset allocation.
1. The S&P 500 Has Plenty of International Exposure
The S&P 500 and total stock market index funds are packed with global giants—companies like Apple, Microsoft, and Amazon. These are the companies you want to own. These businesses operate internationally, bringing in substantial revenue from markets across the globe. So, when you invest in these funds, you’re already getting a healthy dose of international exposure, without stepping outside U.S.-based indexes.
2. Higher Fees and Expense Ratios
Now you know I hate fees. I hate them more than anything in finance.International funds often come with higher costs. Expense ratios tend to be higher because managing these funds requires navigating foreign markets, currencies, and regulations. Over time, those fees chip away at your returns, and I’d rather keep more of my money working for me.
3. Quality of Companies
Compare the top 10 companies in the S&P 500 to the top 10 in an international fund. It’s not even close. The U.S. market dominates in terms of innovation, profitability, and stability. While international funds might include some strong players, they’re often diluted with less competitive companies that don’t measure up.
4. Currency and Accounting Risks
J.L. Collins highlights two critical risks with international funds in his Stock Series:
- Currency Risk: When you own international companies, they trade in their home country’s currency. Exchange rates fluctuate against the U.S. dollar, adding a layer of uncertainty to your returns.
- Accounting Risk: Not all countries have the same rigorous accounting standards as the U.S. Even here, we’ve had scandals like Enron. In emerging markets, the risk of weak regulation and questionable accounting practices is even greater.
The Downsides of Avoiding International Funds
Of course, skipping international funds isn’t without drawbacks. If there were ever a complete economic collapse of the U.S.—which I find highly unlikely—this strategy could leave you overexposed to a single country. But let’s be honest: if that happens, we’ll all have much bigger problems than the lack of international diversification in our portfolios.
Breaking Traditions
Just because it’s traditional to include international funds doesn’t mean it’s the right choice. Investing is about weighing the risks and rewards, and for me, the scales tip in favor of keeping things simple with U.S.-based funds.
If you’re curious about diving deeper into this topic, J.L. Collins has an excellent post explaining these points further: Stocks Part XI: International Funds.
In the end, investing is personal, and what works for one person might not work for another. I fight for simplicity in my portfolio because I know when I add complication, my returns always seem to go down.
