The US stock market is the world’s largest capital market and offers an exceptional range of opportunities. Many foreign companies directly list their stock on US stock exchanges like the NYSE or the Nasdaq. If you’re interested in diversification, though, you should consider adding foreign-listed stocks to your portfolio.
Here are three ways in which US investors can gain access to foreign markets and get exposure to the growth of other economies.
1. Investing In Foreign Stock Through the US Markets
The first option is to check if a foreign company has listed American Depository Receipts or ADRs on a US stock exchange.
Here’s how it works. A financial institution (often a bank) buys foreign shares and holds them in a foreign subsidiary. The bank holds this share in inventory and emits an ADR to allow US investors to trade the foreign share directly on the US market and in dollars.
ADRs are a great option for US investors who want to invest in non-US stock markets without having to buy from a foreign stock exchange or another currency.
Unfortunately, ADRs are not available for all stocks. They are usually available only for the stocks popular enough for the bank to be interested to do all this work.
Another similar option is a Global Depository Receipt or GDR. A GDR is similar to an ADR except the listing is done in the US and other countries, often in Europe or Asia.
2. ETFs and Mutual Funds
American investors who wish to invest in non-US stock markets may not always want to pick individual stocks. Many investors seek diversification or wish to bet on a general theme (emerging market, Europe, Asian tech, etc…). Global mutual funds or ETFs can provide such exposure.
There are thousands of different options on offer, allowing for very detailed targeting.
3. Direct Investing
Some foreign stocks do not have ADRs or GDRs available. Even if they are part of an ETF, you may not be interested in buying another 90 stocks at the same time. Maybe you have a specific opinion on this specific stock and want to buy only this one.
In this case, you need a broker able to give you access to foreign markets. Such a broker should be a reputable one, and saving on fees should not be a reason to go to a third-rate provider.
Here you have a choice of going with a US broker that will give you access to foreign exchanges or opening a brokerage account overseas. Let’s explore both of those options.
Best Brokers For Buying Foreign Stocks
Interactive Brokers
One of the widest ranges of international investment. Interactive Brokers (IB) offers access to 33 countries, 150 different stock exchanges, and 23 currencies. The company offers a full trading platform that is very powerful but may be a little intimidating for beginner investors. Fees are reasonable, but their structure can be described as overly complicated.
IB is a great choice for experienced US investors who want to invest in non-US stock markets.
Fidelity
Fidelity offers a smaller range of foreign investments than IB, with access to 25 countries and 16 foreign currencies. Fidelity acquired a reputation as a low-fee broker in the US, but fees can be higher for some foreign markets. It still can be a great option for investors looking for foreign access but is also a solid low-fee trading platform in the US.
Schwab
Schwab is a well-respected US brokerage firm with limited international options: it offers access to only 12 markets. The commission fees depend on the currency used, and they can be pretty steep compared to their competitors.
If you already have a Schwab account this is a way to add some foreign stocks to your portfolio. If you’re looking to open an account purely for foreign trading it’s probably not the best option.
Online Brokers
Most purely online brokers – like E*Trade or Robinhood – do not offer access to international markets. If they do it is very limited and only available for over-the-phone orders.
The complexity and costs to navigate foreign regulation, open foreign branches, etc. make international investing a sector still mostly reserved for older, bigger, more established players.
Opening a Brokerage Account Overseas
Instead of relying on international access through a US-based broker, one last option is to directly open an account with a broker established overseas. This can be tricky, as some might not accept US citizens. Some (like Degiro) have no problem with US citizens but need their clients to be registered as residents in the EU only.
It can also be difficult to assess from abroad the seriousness and reputation of foreign brokers. For this reason, we recommend using only brokers that are well-established, reputable and registered with the local financial authorities (the local equivalent of the SEC).
Here below are some examples.
- Monex Boom, for trading in Hong Kong and 10 other Asian markets (Australia, Japan, China Taiwan, Indonesia, etc…)
- Degiro, for investing in Europe, but also Istanbul, Canada, Hong Kong, Tokyo, Singapore, and Australia.
Directly opening a foreign account might open you access to hard-to-reach markets, like some frontier markets (places like Africa or part of the Middle East) or emerging markets (like South-East Asia).
Unless your strategy clearly requires such a service it is probably not worth the effort. The US-based brokers mentioned above are enough for most US investors who want to build an overseas portfolio.
Taxes and Withheld Dividends
Investing in foreign stock can be quite complicated from a tax point of view. Some foreign governments will tax dividends before they reach your account, on which you might still have to pay income tax in the US. Some foreign countries will also tax your capital gains, even if you are not a resident.
To compensate for such double taxation (abroad and in the US), the IRS has created the concept of “foreign tax credit”. It means you can deduce some of the taxes you paid on foreign investment to your taxes in the US.
This involves a series of special forms, notably the 1099-DIV informing of what you paid abroad, and the Form 1116 to fill your request for the foreign tax credit.
☝️ If you are investing in foreign markets we recommend consulting a tax professional. You want to be sure you are both in good standing with the IRS and not missing precious tax deductions.
