What is an International ETF? Types, Risks

Investing is an activity that can offer you numerous opportunities to generate wealth and to utilise your money effectively. In addition to investing in financial instruments within your own country, investors can also benefit by tapping into the growth potential of other countries. However, knowing which companies to invest in can be challenging. Moreover, investing in international companies directly may be complicated. This is where an international ETF comes into the picture. In this article, we will learn what an international ETF is, how they work, and other key things you should know.

What are International ETFs

An exchange-traded fund (ETF) is a financial instrument that pools money from investors and invests the funds into a basket of securities such as stocks, bonds, commodities, or indices. An ETF is traded similarly to stocks, allowing investors to buy and sell the units easily. An ETF usually tracks a specific asset and aims to replicate the returns of the underlying asset.

An international ETF is an ETF that invests in global assets. An international ETF offers global exposure by investing in assets that belong to a specific region, country, or sector. International ETFs may invest in global equities, bonds, or other assets.

How do International ETFs Work?

The main objective of an ETF is to replicate the performance of the underlying asset. Typically, ETFs track a benchmark index and invest in the securities that make up the index. This allows the ETF to generate identical returns to the benchmark index.

An international ETF invests in a basket of international securities that make up an index. International ETFs can track an index of a specific country, a region, or a global sector. Most international ETFs are passively managed, meaning they invest in the assets that comprise the index with similar weightage to generate returns close to the benchmark index.

For example, an international ETF that invests in U.S. stocks might track the S&P 500. The ETF would invest in companies in proportion to their weightage in the S&P 500. If the S&P 500 rises, the value of the ETF will also increase.

Types of International ETFs

Why Invest in International ETFs

There are several advantages of investing in international ETFs:

Broader Exposure

One of the primary benefits of investing in an international ETF is that it provides a broader exposure to investors. Investors can gain exposure to global companies or sectors through investing in an international ETF.

Diversification

An international ETF allows investors to diversify their portfolio across borders. This not only helps in spreading risk across securities but can also help hedge country-specific risks.

Growth Opportunities

Through an international ETF, investors can benefit from global economic trends or tap into opportunities in other countries, providing ample scope for growth.

Convenience

Investors can conveniently invest in a basket of global securities by investing in an international ETF. This makes the process of gaining global exposure easy.

Risks of Investing in International ETFs

As an investor, it is important to know the risks and considerations of investing in an international ETF.

Country-Specific Risks

One of the key risks of investing in international securities is country-specific risks and challenges. An economic slowdown in a country can impact growth, which in turn affects the performance of ETFs.

Currency Rates

The fluctuations in foreign exchange can directly impact your gains or losses. Depending on the foreign exchange rate, your profits may decline upon converting them back to the domestic currency.

Regulatory Risks

Regulatory risks, such as trade barriers or laws that impact production or manufacturing, can affect the performance of international securities. Moreover, the tax laws and investment regulations can also impact your investments.

Geopolitical Events

Geopolitical events such as armed conflicts or political instability can affect specific countries and impact the global economy. Consequently, this can lead to lower performance of international securities.

How to Invest in International ETFs from India

To invest in international ETFs from India:

• Step 1: Open a demat account with a SEBI-registered broker or depository participant.
• Step 2: Search for an international ETF that you want to invest in.
• Step 3: Through your broker or DP’s trading platform, enter the quantity and price at which you want to purchase the ETF.
• Step 4: Once the ETFs are credited to your demat account, you can monitor their performance.

Top International ETFs Available in India

Taxation on International ETFs

Depending on the holding period of the ETF, the gains on ETFs are subject to capital gains tax. Gains on ETFs held longer than 24 months attract long-term capital gains tax, while ETFs held for less than 24 months attract short-term capital gains tax.

Dividend income is treated as part of your income and taxed at the applicable tax slab. As per India’s Double Taxation Avoidance Agreement (DTAA), tax credit can be claimed if tax is deducted in the foreign country.

International ETFs vs. Indian ETFs.

International ETFs and Indian ETFs both offer plenty of benefits. An ETF helps in building a diverse portfolio, reducing risk, and gaining exposure to several securities and sectors. The key benefit of international ETFs is that they provide broader exposure and allow investors to tap into global markets. Since Indian ETFs focus specifically on the Indian market, it is not possible to capitalise on international growth opportunities through them.

Who Should Consider Investing in International ETFs

• International ETFs are suitable for investors looking for global exposure and building a diverse portfolio.
• It is suitable for investors who want to invest in a specific country or global sectors.
• International ETFs are suitable for investors willing to take on the higher risk of investing in foreign markets.