Investing Overseas

	Paul Tracy Street Authority.com
Special offer from StreetAuthority.com: Winning picks are up 242%, 189% and 135%. FREE Report--HIGH-GROWTH GAINS FROM LOW-TECH STOCKS.

In the late 19th century, Britain was still the world's preeminent superpower. At the time, many of the world's largest companies were British and the largest stock market in the world was still the London Stock Exchange.

But right around the turn of the twentieth century, something changed. The U.S., still a largely agrarian society a half-century earlier, was rapidly becoming a world manufacturing power. America's automobiles, for example, were becoming the finest in the world and New York was rapidly becoming a major, if not preeminent, financial center.

Of course, Britain didn't disappear from the face of the Earth; the nation still today remains a highly advanced, wealthy country with a good standard of living. But the U.K. was already highly developed by 1900, and at that point in time economic growth there began to slow -- the natural consequence of a maturing economy. At the same time, the U.S. was in the early stages of industrialization, which left plenty of room for growth ahead.

Fast forward 100 years, and the U.S. is clearly the largest and most dominant economy on Earth. With Gross Domestic Product (GDP) of more than $10 trillion, America's economy is more than twice the size of Japan's, which weighs in with a GDP of less than $5 trillion. What's more, the American economy today is growing at a better than +3% annual clip -- a respectable rate for a mature country.

But like Britain in 1900, the U.S. is advanced and fully industrialized. As a result, it's unlikely that the country can continue to grow at the same pace it has over the past century. Annual growth of just +3% to +4% is considered strong for such a large, developed economy. Although I fully expect the U.S. to remain the world's largest and most dominant economy for the foreseeable future, it will definitely not be the world's fastest-growing economy in the coming years.

A century ago, vast wealth was available to investors with the foresight to jump into American stocks as the nation was still in the early stages of its economic growth curve. Imagine, for example, getting into stocks like General Electric (GE) and Wal-Mart (WMT) before they became dominant global companies -- these stocks both produced gains of several thousand percent for savvy investors who got in early in their development.

A similar opportunity is available to modern day investors -- investing in fast-growing foreign markets that are still at the beginning stages of multi-decade growth curves. Check out my chart of past GDP growth and future GDP growth projections based on data supplied by the International Monetary Fund (IMF).

The IMF divides the world into two groups -- developed and emerging countries. The developed world consists mainly of Europe, the U.S. and Japan. The developing world includes much of Asia, Latin America and Africa. It's clear that over the past 10 years, the developing world has delivered GDP growth that's considerably higher than what we've seen here in the U.S.

Breaking the same data down further, my second chart compares the quarterly growth rates posted by China and India to those of the U.S., Europe and Latin America. Again, it's apparent from this data that China, India and Latin America are growing at a faster clip than the U.S. or Europe -- these nations are all early in their growth phases.

Fortunately, U.S. investors can easily gain exposure to some of the world's fastest-growing economies by investing in various American Depository Receipts (ADRs) and foreign Exchange-Traded Funds (ETFs) -- two investment types that I'll detail in more depth below. Unfortunately, surprisingly few American investors take advantage of these high-growth opportunities. A recent study from the University of Michigan revealed that fewer than 8% of Americans invest in companies outside the U.S. Meanwhile, the average European investor is more than twice as likely to invest outside his or her home country.

And failing to garner a share of all that growth can be detrimental to returns. A study by Vanguard covering the period from 1973 to 2003 shows that European stocks actually offered about a 1% annualized advantage over U.S. stocks -- returns of approximately +12.5% annually against just +11.5% for the U.S. Meanwhile, emerging markets did even better, offering returns close to +15% annualized over the same period.

Although 1% to 2% annualized gains might seem like a trivial advantage, that's certainly not the case when looked at over a long time period. For example, $100,000 invested for 30 years at +11.5% would grow to about $2,610,000 -- a very respectable sum. However, if you were able to invest that same $100,000 at +12.5% per year, then you'd end up with over $3,400,000 at the end of 30 years -- an improvement of almost one million dollars.

As my chart shows, the stock markets in China and Brazil have both handily outpaced the performance of the S&P 500 since 2000. Investors who ignored the growth in these countries missed out on some phenomenal returns.

A Global World
But superior growth isn't the only reason to invest outside the U.S. Another reason is risk reduction. Simply put, not all economies and stock markets move in the same direction at the same time. For example, when the U.S. stock market is trending lower, a select basket of foreign stocks may be trending higher. By diversifying internationally, investors can lower their risk while enhancing their potential returns.

A study conducted by Merrill Lynch for the period from 1973 to 2003 shows that a basket of 20% foreign stocks and 80% domestic stocks returned about +12.7% annualized. Meanwhile, a portfolio of only U.S. stocks nearly matched that return at +12.5% annualized. The big difference: the global portfolio showed less volatility and lower risk.

In addition, foreign markets are not carbon copies of the U.S in terms of key metrics like valuation and dividend yields. The British market is very mature, for example, and offers growth characteristics broadly similar to that if the U.S. However, the nation's most widely tracked index, the FTSE 100, sports a dividend yield of 3.45%, more than 50% higher than the S&P 500's 1.99% yield.

Meanwhile, even though South Korea is home to some globally competitive companies such as electronics giant Samsung, the nation's KOSPI Index isn't expensive by any measure. Korea trades with a P/E of just 9.1 times trailing earnings, less than half of the S&P 500 19.4 times earnings. That's despite the fact that the Korean economy has grown faster than the U.S. over the past 20 years.

The table below summarizes some key economic and stock market metrics for various countries around the world. In looking at this table, it's clear that many foreign markets offer valuation, yield and growth advantages when compared to the U.S.

Buying the Story

Due to new financial innovation, it's easier than ever for American investors to gain exposure to foreign equities.

Hundreds of individual foreign companies trade as ADRs on the major U.S exchanges. ADRs are nothing more than receipts issued by a U.S. bank that represent ownership in foreign companies. Most trade on the NYSE or Nasdaq and all trade conveniently in U.S. dollars. In addition, all dividends or distributions made by the foreign companies are converted to dollars by the issuing bank and are paid out to ADR holders. Buying ADRs is just as easy and inexpensive as buying domestic stocks through your broker.

And to garner even broader diversification, my favorite vehicle for foreign investing is via exchange-traded funds (ETFs). International ETFs offer broad exposure to individual foreign markets or regional markets. Through the simple purchase on a single ETF, U.S. investors can actually purchase a stake in scores of foreign companies in different market sectors -- retail, banking, consumer products and energy companies, for example. Many of the firms that are encapsulated in these ETFs don't offer ADRs and would therefore be difficult for U.S investors to buy directly.

In short, ETFs represent the fastest and easiest way for investors to not only diversify their portfolios, but also to gain exposure to some of today's most promising foreign markets.

In the two tables below, I offer a long list of my favorite ADRs and foreign-focused ETFs complete with some key summary statistics. Investors may want to consider these ADRs and ETFs, as they could provide both solid returns and much-needed diversification to your portfolio in the years ahead.

Foreign-Focused ETFs

High-Quality ADRs

----------------------------

I sincerely hope you've enjoyed today's look at various international investing opportunities. Please stay tuned for my next full issue, which I'll publish on Monday, August 15th. In it, my staff and I will examine some of the world's most innovative companies. Thanks to heavy spending on research and development (R&D), these leaders should not only remain on the cutting edge of new corporate and product innovations, but should also deliver outsized returns in the years ahead. Good investing!

Paul Tracy will be available to take your questions until Monday, August 15. Please use the form below to submit your questions.