Considering investing in international equities?
There are myriad good reasons for doing so. Deciding between active and passive when investing abroad is an important first step, with active offering some significant advantages to be considered.
Why invest abroad? Many investors, including Canadians, are heavily exposed to tech-heavy U.S. equities, with major names like Apple, for example, heavily represented. Non-U.S. equities can help investors add meaningful diversification to their portfolios. What’s more, many domestic indexes miss out on opportunities available in international and emerging markets. Important macrotrends, like India’s rising middle class and reshoring supply chains, can help international investments shine, and potentially add an important source of growth to portfolios.
When looking toward those opportunities, however, it matters how investors approach them. Passive funds may offer relatively straightforward exposure, but investing internationally may require a bit more punch. Passive funds can lack the flexibility needed to adapt to important trends, and may have trouble properly representing certain market segments. Should a passive, index-tracking fund have certain strict rules in constructing its portfolio, it may be forced into certain investments because of those rules, even when another opportunity may have better served the strategy’s goals.
An active approach, by contrast, can adapt to take advantage of tailwinds or to avoid headwinds. An active strategy, leaning on managers’ expertise in certain specific foreign markets, can craft a portfolio to offer a bespoke exposure or set of exposures to global markets. What’s more, active funds, often in the ETF wrapper, can more aggressively pursue outperformance and capital appreciation for investors.
Looking ahead, international diversification could potentially boost investor portfolios over the long-term. For those eyeing a portfolio refresh, it may be worth taking a closer look at the advantages of active versus passive before diving in.