Investing - International

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The US is in bad shape fiscally. 39,000,000,000,000 dollars in debt, an estimated 100,000,000,000,000 in unfunded liabilities. For a population of 350 million, that's $111,000 and $285,000 per person. And only one third of the population pays any federal income taxes, so 333,000 and 855,000 per taxpayer. And if the debt magically dropped to zero, our government has no mechanism to avoid returning to the same situation in short order.

It is often argued that US corporations do a lot of business internationally, so there is no need to invest in foreign businesses. But that does not address the problem of a weak US Dollar (USD).

So I decided I should be investing 20% (to start) of my assets in foreign businesses. I found that many foreign corporations allow US investment through American Depositary Receipts (ADRs). An ADR certificate represents shares of a foreign corporation and trades on a US exchange (NYSE, Nasdaq, etc.) or over the counter. Most ADRs on US exchanges are sponsored by the corporation, but others are unsponsored. ADRs remove much of the complexity of owning foreign stocks directly. Dividends from ADRs are generally qualified, after a holding period, so you pay the capital gains income tax rate. It is easy and effective to invest in foreign corporations.

ADRs are traded in USD. But the price tracks the home country price via arbitrage (institutional buys and sells). You get dividends in USD at the current exchange rate. So ADRs and their dividends reflect the value in the home country currency, making them useful as a USD hedge.

For US taxpayers, in taxable accounts, many ADRs report withheld foreign taxes on dividends. You pay capital gains taxes on trades and dividend taxes as with US stocks, but you get the foreign tax credit. In a Roth IRA the foreign tax credit cannot be used, but there are no taxes on the dividends (or capital gains). In a traditional IRA, the foreign tax credit cannot be used, and you pay income tax rate on the dividends (and capital gains) on withdrawal. I prefer using a Roth for my international assets, but many investors prefer a taxable account.

There are ETFs that include ADRs that are similar to US ETFs. SCHY is an international version of SCHD. VYMI and VIGI, international versions of VYM and VIG. All with just slightly higher fees.

Since I want stable, profitable foreign corporations, I use mostly SCHY. It has been suggested that dividend growth ETFs are likely more stable than high dividend ETFs because they exclude corporations that pay high dividends to attract investors. But dividend growth ETFs don't pay high dividends, so I consider a lot of those corporations to be growth oriented. SCHY is a good compromise because it filters on quality and dividends.