Investing in international ETFs offers a great way to diversify your portfolio beyond domestic markets. Whether you’re looking at European equity ETFs, emerging market funds, or commodity-based ETFs, these investments can provide global exposure and potential growth opportunities.
However, investing in foreign ETFs comes with additional challenges, such as currency risk, tax implications, regulatory differences, and trading hour mismatches. If you’re a U.S. or global investor planning to allocate funds to international ETFs, here are five crucial risks to understand before making your move.
1. Currency Exchange Rate Risks
✅ Currency Fluctuations Can Impact Your Returns
When investing in international ETFs, you’re also exposed to foreign currency movements. If your home currency strengthens against the currency in which the ETF is denominated, your returns may shrink. Conversely, if your home currency weakens, you could see gains.
✔ If the U.S. dollar strengthens → Foreign ETF values decrease when converted back to USD
✔ If the U.S. dollar weakens → Foreign ETF values increase when converted back to USD
📊 Example:
- Suppose you invest in a European ETF denominated in euros (EUR).
- If the EUR/USD exchange rate drops, your investment may lose value when converted back to U.S. dollars.
- If the USD weakens against the euro, your ETF’s value increases when you sell.
💡 How to Manage Currency Risk:
✔ Consider currency-hedged ETFs to minimize forex risk
✔ Diversify across multiple global markets to balance exposure
✔ Use dollar-cost averaging (DCA) to mitigate short-term currency fluctuations
2. International Taxation & Withholding Taxes
✅ Taxes on Foreign ETFs Differ by Country
International ETFs often have different tax rules, depending on where they are domiciled. Many countries impose withholding taxes on dividends, meaning a portion of your earnings could be taxed before you even receive them.
🔹 U.S. investors in U.S.-listed international ETFs (e.g., Vanguard FTSE Developed Markets ETF, VEA)
- No capital gains tax until you sell
- Foreign dividends may have withholding taxes (varies by country)
🔹 U.S. investors in foreign-listed ETFs (e.g., buying a European ETF listed on the London Stock Exchange)
- May be subject to capital gains tax in the foreign country
- Additional tax reporting may be required under FATCA regulations
📊 Example:
- If you invest in a Swiss-listed ETF, Switzerland imposes a 35% withholding tax on dividends.
- The U.S. has a tax treaty with Switzerland, so you may reclaim some of that tax through foreign tax credits (Form 1116 on U.S. tax returns).
💡 How to Minimize Tax Burden:
✔ Check whether a tax treaty exists between the U.S. and the ETF’s domiciled country
✔ Invest in U.S.-listed international ETFs to simplify tax reporting
✔ Use foreign tax credits to offset double taxation
3. ETF Expense Ratios & Liquidity Differences
✅ Not All International ETFs Have the Same Fees & Trading Volume
While U.S. ETFs tend to have low expense ratios, foreign ETFs often have higher fees due to increased operational costs.
✔ Expense ratios are typically higher for international funds
✔ Liquidity can be lower, leading to wider bid-ask spreads
✔ Currency conversion fees may apply when purchasing non-USD ETFs
📊 Example:
- Vanguard FTSE Developed Markets ETF (VEA) – Expense Ratio: 0.05%
- iShares MSCI Emerging Markets ETF (EEM) – Expense Ratio: 0.68%
Even though both provide international exposure, EEM’s higher fees eat into returns over time.
💡 Key Considerations When Choosing ETFs:
✔ Compare expense ratios before investing in foreign ETFs
✔ Choose ETFs with higher trading volume to ensure better liquidity
✔ Consider U.S.-listed ETFs tracking international markets instead of directly buying foreign ETFs
4. Trading Hour Mismatches & Market Volatility
✅ International ETFs Trade on Different Time Zones
One of the biggest challenges with investing in foreign ETFs is time zone differences. If you hold an ETF listed on an exchange in Asia or Europe, you may find that major price movements occur when U.S. markets are closed.
✔ U.S. ETFs trade from 9:30 AM – 4:00 PM ET
✔ European ETFs trade from 9:00 AM – 5:30 PM GMT
✔ Asian ETFs trade during local market hours (often opposite U.S. hours)
📊 Example:
- If you own a Hong Kong-listed ETF, major price swings can happen overnight while U.S. markets are closed.
- Without pre-market or after-hours trading, you may not be able to react immediately.
💡 How to Manage Time Zone Challenges:
✔ Consider U.S.-listed ETFs that track foreign markets to avoid this issue
✔ Use limit orders instead of market orders to avoid unpredictable pricing
✔ If investing directly in foreign ETFs, check if your broker offers 24-hour trading
5. Country-Specific Regulations & Investment Restrictions
✅ Some Countries Restrict Foreign Investors from Certain ETFs
Not every country allows foreigners to invest freely in their markets. Some impose capital controls or restrictions on ETF ownership.
📊 Example:
- U.S. investors cannot access some European ETFs due to MiFID II regulations
- India & China have strict foreign investment laws, making direct ETF access difficult
- Some countries require local brokerage accounts to trade their ETFs
💡 How to Avoid Issues:
✔ Research country-specific ETF restrictions before investing
✔ Choose U.S.-listed international ETFs for easier access
✔ Use global brokerage accounts (e.g., Interactive Brokers) for broader market access
How to Invest in International ETFs Wisely
✅ Diversify across different markets to reduce currency & country-specific risks
✅ Understand tax implications before buying foreign ETFs
✅ Compare expense ratios & liquidity before selecting an ETF
✅ Consider time zone differences and their impact on trading
✅ Check country-specific regulations to ensure eligibility
👉 International ETFs can be a great way to expand your portfolio beyond the U.S., but they come with unique challenges. By understanding these five key factors, you can invest smarter and minimize risks. 🚀
