One should view international equity investment as a method of diversification based on the level of correlation between countries. Correlation measures the relationship of the market between two countries. For example, a negative correlation between the United States and Jordan indicates that when the market in the U.S. is bearish, the U.S will not affect Jordan’s market and it may have gone the other way. According to studies, the average correlation of the U.S. and other developed economies is 0.45, while that with emerging economies is only 0.25.

By constructing an international portfolio will not only diversify away the systematic risk in the home country, empirical evidence suggests that it can also boost up the return on the portfolio. Beside the United States as a sophisticated market, there are also developed economies such as London, Tokyo, and Hong Kong, and emerging economies such as Brazil, Jordan, and China. There are numerous ways to invest internationally. One way is to buy mutual funds. Mutual funds diversify your portfolio since the fund may invest a percentage of its portfolio in other countries. Today an investor can find a fund that invests in many countries in different industry for a different percentage. An example would be GTDDX. However, the disadvantage is the cost associated with the fund. Another way to invest internationally is to buy exchange traded fund. ETF trades like a stock on regular market such as the Dow. For example, ITF invests in numerous Japanese companies such as Canon, Honda, and Sony. The ETF itself has diversified in twelve different sectors with the most holdings in the consumer goods category.

On the other hand, there are barriers to international equity investment. Investors may perceive risk due to unfamiliarity of the outside countries. Furthermore, gathering Information is more expensive, or difficult to obtain because of less disclosure. The release of information is also delayed, or unavailable. Transactions are costly due to brokerage commissions, transaction taxes, and exchange commissions. The exchange rate also poses a great risk for amateur investors. Despite all these barriers, studies have found that international equity investment is a very effective way to diversify portfolio because of the low correlation of selected countries.