Domestic, global, and international funds — What's the difference?

We’ve all heard about the global economy. The financial world really has gotten smaller as more and more companies do business worldwide. Financial issues in one country can have a direct impact on the financial markets in other countries.

Investors may want to categorize their investments by geographic areas in order to create diversified portfolios. To do that, it’s important to understand the broad differences among investments that call themselves domestic, global and international. Many of the world’s most attractive investment opportunities may exist in economies outside of the U.S., so it could be a good idea to include some foreign investments in your mix.

Sticking close to home.

Domestic investments invest in U.S.-based companies. While there are plenty of U.S. firms that do almost all of their business here at home, many large U.S. companies are considered “multinationals.” This means they have substantial financial and business relationships in at least two countries. Some of these domestic firms get a significant amount of their profits from overseas, but they are still U.S. corporations so the company names listed in a typical domestic fund may be familiar. Domestic holdings allow an investor to invest in U.S. companies, but you may still have indirect foreign exposure in your portfolio from the earnings a U.S. company has received from off-shore operations.

Global means global

Global investments invest in companies anywhere on the globe, including the U.S. In fact, global investments may hold as many U.S. stocks as some domestic investments. Because global investments have the flexibility to invest in virtually any country, and they typically focus on large, well-established companies, these investments, while still subject to risk and possible loss, are generally viewed as more stable than other types of funds that include foreign securities.

Anywhere but here

International investments invest in companies anywhere in the world except the United States. If you hold domestic investments in your portfolio, and are concerned that global investments might overlap your existing U.S. holdings, international investments are a way to focus exclusively on foreign markets. This can help broaden your diversification because international companies may perform differently compared to U.S. companies.

Getting more specific

For even greater diversification opportunities, country or regional investments (sometimes called geographic sector investments) limit investments to companies in a specific country or geographic region. Emerging market investments typically invest in undeveloped countries and markets that are experiencing rapid growth or that have rapid growth potential. These specialty investments can be quite risky because they may be focused on just a few industries within a specific area and any political, economic or social events could significantly impact fund performance. Examples include: India, Mexico, Brazil, Peru, Russia, Turkey, Egypt, Greece, Pakistan, and Saudi Arabia. Frontier market countries are less established and riskier than emerging markets. Examples include: Bangladesh, Croatia, Estonia, Jordan, Kenya, Lithuania, Kazakhstan, Mali, Morocco, Nigeria, Oman, Serbia, Senegal, Sri Lanka, Tunisia, and Vietnam¹.

The risks may feel foreign

Investments outside of the U.S. possess a special set of risks. Global and international investing has currency risk; meaning the value of your investments can fluctuate based on what happens to the currency in the foreign country. Foreign markets may have different rules about how much information must be disclosed to investors, making it more difficult to research investments. In addition, foreign tax issues may be complex. You may find yourself at the mercy of an unstable political regime, which could have a significant impact on the value of your investment. Investing in international mutual funds rather than directly in foreign securities may decrease your risk.

Manage risks with diversification

Careful diversification across domestic, global and international funds can open up additional investment opportunities not available when limiting yourself to U.S. securities. It may also help to spread your overall portfolio risk. Keep in mind, however, that using diversification as part of your investment strategy does not guarantee better performance or protect against loss in declining markets.

¹ MSCI market classification