International investing through exchange-traded funds, or ETFs, makes sense to many investors today, but there are obvious risks associated with international investing, an Investor’s Daily Edge analyst says.
“We’ve become spoiled from the regulatory web created in the United States, all of course in the best interest of the investor,” says senior market analyst Chris Johnson. “But with international companies, understand that you move far away from the wealth of information available on domestic stocks.”
The second risk is associated with the potential volatility of these investments due to structural differences.
“The governance of some international markets is less structured than what we’ve become accustomed to with our domestic markets,” Johnson says. “Wednesday’s trading activity in the Asian markets serves as a great example. The Shanghai Composite tumbled 6.5 percent after the Chinese government tripled the tax on stock trades in order to cool their growth international ETFs can take investors for a quick ride, both up and down.”
However, investors haven’t been able to swing a dead cat without hitting an analyst telling them that the grass is greener on the other side of either ocean. That is another sign that the crowd is moving money internationally, and fast.
“The danger with the rapid increase in international ETF investing is that we begin to form, dare I say, a bubble,” Johnson says. “And now Mr. Greenspan is throwing comments around about how some of these international markets are due for a slowdown. The upshot is that the crowded trade created by the herd of lemmings jumping off domestic shores into international waters increases the chance that when the decline comes, it will be magnified because the ‘crowd’ contains a lot more potential sellers.”