Definition:
Foreign Stock is a category of mutual funds that primarily invest in stocks of companies outside of the United States. According to Morningstar, these funds will typically have less than 20% of assets invested in U.S. stocks.
It is important for an investor to understand that the Foreign Stock category of mutual funds differs from other similar-sounding categories, such as World Stock or Emerging Market Stock. For example, a mutual fund in the World Stock category will typically have 20%-60% of assets in U.S. stocks. However, a fund in the Foreign Stock category will have more than 80% of its holdings outside of the U.S. Therefore, for diversification purposes, Foreign Stock may be a better choice for the average investor because there is less overlap with their mutual funds that invest in U.S. stocks. For example, a World Stock fund may have up to 60% of its holdings in the U.S. and an investor may already have those same holdings in another fund. This is not good diversification.
Risk to Investors:
Investors should be careful not to invest too large of a portion of their total investment assets in the Foreign Stock category because certain foreign countries and their economies may be less stable than the U.S. economy. Also, a lack of uniform accounting rules in foreign countries create less transparency. This form of market risk inherent with foreign stocks is referred to as Political Risk or Geopolitical Risk.
