If most of your investments are in one country or a small number of companies, your financial future can become closely tied to what happens there. Global diversification is one way of spreading that dependence more widely.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
A a glance
01.
Global diversification spreads exposure across companies, sectors and countries.
02.
A global ETF can provide broad market exposure through one investment, but ‘global’ doesn’t mean evenly spread.
03.
Diversification can reduce reliance on a few companies, sectors or markets, but it cannot prevent losses or remove currency risk.
What does investing globally mean?
Investing in stocks globally means owning shares of businesses in different parts of the world. Instead of depending mainly on companies listed in one country, such as the UK, an investor may gain exposure to companies in other regions, such as North America, Europe and Asia-Pacific.
The purpose is not to predict which country will perform best. It’s to avoid making the outcome of a portfolio depend too heavily on one economy, market, or group of companies.
Different markets have different strengths. Some have more technology or healthcare companies, while others have greater exposure to financial services, energy, manufacturing or consumer businesses. Investing across several markets can therefore provide access to a broader mix of economic activity.
However, ‘global’ investing isn’t a guarantee of complete coverage. Global investments can differ in the countries, regions and company sizes they include. Investors therefore need to look beyond the word ‘global’ and check what an investment actually holds.
Why do UK investors diversify beyond the home market?
UK investors may diversify globally to access more companies and industries and to reduce reliance on the UK stock market.
A portfolio focused mainly on one country can be more exposed to that country’s economy, political decisions, currency and stock market structure. Holding investments across several markets can spread those risks more widely.
This doesn’t mean UK investments should be avoided. The key question is how much of the portfolio should be allocated to UK companies. It s understandable to feel more comfortable with familiar UK companies. But familiarity doesn't necessarily mean lower investment risk. This tendency to favour investments from your home market is often called ‘home bias’.
How can investors access global markets?
Investors can build global exposure in several ways. They can buy shares in individual overseas companies, combine investments from different regions or use a fund that holds many companies on their behalf.
One of the most common types of funds is an exchange-traded fund (ETF). An ETF is a fund that can be bought and sold on a stock exchange. A global ETF may hold shares in hundreds or thousands of companies, giving investors broad exposure through one investment.
For the rest of this article, global ETFs are used as the main example because they’re a common way to access global stock markets.
What does a global ETF actually own?
A global ETF invests in the shares of companies in the markets and companies set by its objective or index. Two ‘global’ ETFs can cover different markets, company sizes and sectors.
What to look out for:
Markets included
Whether the ETF covers developed markets only or also includes emerging markets
Company size
Whether it focuses on large and medium sized companies or also includes smaller businesses
Weighting method
How much of the ETF is allocated to each company or country
Largest exposures
Which countries, sectors and companies have the greatest influence on performance
Asset type
Whether it holds global shares only or also includes bonds or other assets
These differences can be seen in two broad iShares global equity ETFs. The iShares Core MSCI World UCITS ETF follows an index of large and medium sized companies in developed markets. The iShares FTSE All-World UCITS ETF follows the FTSE All-World Index, which covers large and medium sized companies across developed and emerging markets.
Both provide broad international exposure, but they don’t invest in the same market universe. This illustrates why investors should look beyond the word ‘global’ and check the underlying index, the markets included and any areas left out.
An ETF’s name is only a starting point. Its objective, index and holdings provide a clearer picture of what an investor actually owns.
A global ETF can also hold hundreds or thousands of companies while remaining concentrated in a few large markets, sectors or businesses. Most global indices don't divide your money equally between countries or companies. Bigger companies are usually given a bigger share. Because the US contains many of the world's largest listed companies, it can make up a large proportion of a global ETF. This is known as market capitalisation weighting.
The ETF’s holdings therefore aren’t divided equally across the world. Investors should look beyond the number of holdings.
Can one global ETF provide enough diversification?
A broad global ETF can provide substantial diversification across companies, countries and sectors in a single investment. For someone starting to invest, this can offer a relatively simple way to build a diversified foundation without having to choose and manage several regional investments.
Whether that’s enough diversification depends on what the investor needs from their overall portfolio. A global equity ETF invests primarily in company shares (also known as equities), so it provides diversification within shares rather than across different types of investments. Over time, investors may consider whether other assets, such as bonds, could complement that global equity foundation based on their goals, timeframe and ability to accept losses.
Adding more ETFs doesn’t automatically make a portfolio more diversified. Two global ETFs may hold many of the same companies, while an additional investment that does something genuinely different may broaden the portfolio more effectively.
For investors getting started, the key point is that diversification doesn’t have to mean owning many different investments from day one. A broad global ETF can form the foundation of a portfolio, with further diversification considered as an investor’s needs and portfolio develop over time.
What can global market diversification help with?
Here, diversification means spreading your investments across different companies, sectors and countries within global stock markets. This is different from diversifying across types of investments, such as shares and bonds.
Diversification spreads risk. It doesn’t eliminate it.
Global markets can fall together, particularly during periods of economic or financial stress. At these times, geographic diversification may provide less protection than expected.
Currency movements can also affect UK investors. Buying an ETF in pounds does not necessarily remove the currency exposure of the overseas companies it owns. Changes in exchange rates can affect the value of those holdings when measured in sterling.
Currency hedged ETFs aim to reduce the effect of exchange rate movements between the investor’s home currency and the currencies of the ETF’s underlying investments. Hedging can reduce currency fluctuations, but it cannot remove all currency risk and may involve additional costs.
Diversification also cannot compensate for an unsuitable investment timeframe or level of risk. A broadly diversified global equity ETF can still fall sharply in value and may not be appropriate for money that will be needed soon.
Frequently asked questions
Key takeaways
01.
Think beyond one market. Global investing can reduce dependence on one country, such as the UK, and broaden access to companies and industries worldwide.
02.
Understand how you’re investing. ETFs are one common fund structure used to access global markets.
03.
Look beyond the label. A global ETF may exclude some markets or be heavily weighted towards a few countries, sectors or companies.
04.
Treat diversification as risk management, not protection.
Continue exploring global investing
Ready to start investing?
Getting started with investing doesn t have to be complicated. With a clear plan and a long term perspective, even small steps can make a difference over time. Many investors begin with a few simple steps:
Define your goals
Consider what you want to achieve and how investing fits into your plans.
Open an investment account
You'll need an investing account with an online investment platform, bank or provider.
Choose a suitable investment approach
A diversified portfolio may include equities, bonds and ETFs.
Start investing regularly
Investing gradually over time can help manage market fluctuations.