Today's comment is by Eric Roseman, our Investment Director and Editor of Commodity Trend Alert.
Dear A-Letter Reader,
Only five years ago, if you wanted to trade stocks in a foreign market, you would have been expected to pay extremely high fees for the least liquid stocks. Even trading stocks in places like London or Frankfurt was considered exotic, so trading there was extremely expensive. But through some innovations in discount brokerage services this summer, several institutions are making international investing easy - including purchasing locally listed shares in China.
For the first time in modern global investing, you, as an individual investor, can open an account for just $5,000 at one of America's largest brokerage firms and trade like a pro almost anywhere in the world.
And it's about time. For too long, individual investors were confined to either mutual funds (mostly high-cost products) or ADRs (American Depositary Receipts). Both alternatives certainly work. And in most cases, a well-managed global equity fund is the best choice anyway if you're a long-term investor seeking international equity exposure.
But sometimes, the best opportunities are in individual stocks. That's especially the case for smaller stocks. Many smaller stocks don't trade as ADRs and if they are listed, they generally have very poor liquidity. In most cases, global investors will find greater liquidity for a stock traded in its domestic market and in the end that means lower fees as spreads are reduced.
E*Trade Financial, Fidelity Investments and Charles Schwab now provide a host of trading platforms for individual investors. Not only can you trade in London or Paris, but you can also play emerging markets like Prague, Budapest and Warsaw, too. Fidelity now offers 36 global markets - more than any other discount broker in North America.
And it's no wonder brokerages are cashing in on the current boom in international investing. The majority of foreign bourses have trounced Wall Street over the last four years, including the MSCI Emerging Markets Index, up over 180% over the last four years.
Investors, however, shouldn't abandon their international mutual funds and exchange-traded-funds (ETF) for individual stock-trading.
The best way to access foreign markets is still through an ETF, index fund and actively-managed mutual funds. These vehicles provide instant diversification across many securities, markets and currencies, which ultimately, reduce risk and portfolio volatility. Overseas stock trading belongs in your portfolio. But when you're planning your long-term investment strategy, professionally-managed products are safer, less time-consuming and in some cases, more transparent. Also, domestically-offered securities are audited according to the guidelines of the GAAP (Generally Accepted Accounting Principles). That's a huge bonus, and it's not always the case abroad as accounting principles differ across markets.
As for withholding taxes on international stock dividends, most major markets already have a mutual tax treaty with the United States. A dividend tax credit is therefore available for most investors venturing abroad, assuming the stock pays a dividend.
Retail global stock trading has arrived. This is great news for The Sovereign Society portfolio. Increasingly, I'm finding more bargains in locally-traded markets, including Singapore's largest REIT and one of Italy's largest banks making a fortune in Eastern Europe. You can't find these stocks in the United States because they don't trade as ADRs.
Go global, go discount brokerage and welcome to the era of unlimited global stock market opportunities!
ERIC ROSEMAN, Investment Director
on behalf of The Sovereign Society
EDITOR'S NOTE:Click here for further information about Schwab trading. Or you can call a Fidelity representative for more information on their global trading at 1-800-FIDELITY. Please note, E*Trade's global trading won't be available until early next year.