How Do I Invest in International Markets in 2026? The Honest Guide

Emily Chen, a 31-year-old data scientist in Portland, OR, first tried to invest internationally by buying shares of a single Chinese tech company through an American Depositary Receipt (ADR). She didn't realize that ADRs can have hidden fees — around 1-3 cents per share — and that the company's accounting standards differed from US GAAP. She also almost fell for a 'hot tip' on a foreign penny stock, which would have been a costly mistake. After that, she stepped back and learned the basics.

What are the main ways to invest internationally?

There are four primary vehicles: International ETFs (e.g., VXUS, IXUS) that hold thousands of foreign stocks; American Depositary Receipts (ADRs) that represent shares of foreign companies traded on US exchanges; Mutual funds focused on foreign markets; and Direct foreign stock purchases through international brokerages. Each has different costs, tax implications, and liquidity. For most people, ETFs are the simplest and cheapest option.

How do currency fluctuations affect my returns?

Currency risk is real. If the US dollar strengthens against the euro, your European stock returns will be lower when converted back to dollars. In 2026, the dollar is expected to remain strong relative to many emerging-market currencies (Federal Reserve, Monetary Policy Report 2026). This can reduce your effective return by 1-3% per year. However, over long periods, currency effects tend to even out. One strategy is to use currency-hedged ETFs, which cost around 0.10% more in fees but reduce this risk.

• Expense ratios: International ETFs average 0.20% vs. US ETFs at 0.12% (Morningstar, 2026 Fee Study).
• Withholding taxes: Foreign governments may withhold 15-30% of dividends. The US has tax treaties with many countries that reduce this to 15%.
• Liquidity: Some international ETFs trade less than 100,000 shares per day, leading to wider bid-ask spreads.
• Regulatory risk: China, Russia, and other countries have changed rules on foreign ownership, causing sudden price drops.

For more on tax implications of foreign investments, see How do I Report Foreign Gifts on my Us Tax Return.

Also, if you have foreign self-employment income, check How do I Report Foreign Self Employment Income.

In short: International investing is essential for diversification, but requires understanding currency risk, withholding taxes, and vehicle costs.

The data scientist from our example — let's call her the analyst — spent roughly three months researching before she acted. She almost made a second mistake: buying a high-cost actively managed international fund with a 1.2% expense ratio. Instead, she followed this process.

Step 1: Choose your brokerage

Not all brokerages offer the same international options. Fidelity, Vanguard, Schwab, and E*TRADE all offer commission-free trading on major international ETFs. However, some brokerages charge fees for buying certain foreign-listed stocks. In 2026, Fidelity and Schwab have the widest selection of no-fee international ETFs. Avoid brokerages that charge $50+ per trade for foreign stocks.

Step 2: Pick your allocation

The classic rule of thumb is to allocate 20-40% of your equity portfolio to international stocks. In 2026, Vanguard recommends 30% for a balanced portfolio. Your exact allocation depends on your risk tolerance and time horizon. If you're under 40, leaning toward 40% makes sense because you have time to ride out currency and market cycles. If you're over 55, 20% may be more appropriate.

Step 3: Select your ETFs

For a core holding, choose a total international stock ETF like VXUS (0.07% ER) or IXUS (0.07% ER). For emerging markets exposure, add a small allocation (5-10% of total portfolio) to an ETF like VWO (0.08% ER). For developed markets only, SCHF (0.06% ER) is a great option. The analyst chose a 70/30 split: 70% VXUS and 30% VWO, giving her broad coverage with extra emerging market weight.

Step 4: Set up automatic investments

Dollar-cost averaging reduces the risk of buying at a peak. Set up automatic monthly purchases of your chosen ETFs. Most brokerages allow this with no minimum. The analyst set up a $500 monthly automatic investment into VXUS. Over a year, that's $6,000 — roughly 6% of her salary — a reasonable amount for international exposure.

Edge cases: Self-employed, high-income, and 55+ investors

If you're self-employed, you can invest internationally through a Solo 401(k) or SEP IRA. For high-income earners, consider using a taxable brokerage account for international ETFs to take advantage of the foreign tax credit. If you're 55+, focus on dividend-paying international stocks or funds, as foreign dividends may be taxed at a lower rate under US tax treaties.

Your next step: Open a brokerage account at Fidelity or Vanguard and set up a recurring investment into VXUS or IXUS. Start with as little as $100 per month.

For more on tax-efficient investing, see How do I Report Foreign Tax Credit on Amended Returns.

In short: Start with a low-cost international ETF, set a target allocation of 20-40%, and automate your investments.

Myth: 'International ETFs are tax-free'

Reality: Foreign governments withhold taxes on dividends before they reach you. The US has tax treaties with many countries that reduce this to 15%, but some countries (like Chile or Thailand) withhold 30%. You can claim a foreign tax credit on your US tax return, but it's an extra step. The gap between the withheld amount and the credit can be significant if you don't file properly.

Myth: 'All international ETFs are the same'

Reality: Some ETFs track different indexes. VXUS tracks the FTSE Global All Cap ex US Index, while IXUS tracks the MSCI ACWI ex USA Index. The difference in performance can be around 0.5% per year due to index methodology. Also, some ETFs include small-cap stocks, which can add volatility. Always check the index before buying.

Myth: 'Currency risk doesn't matter long-term'

Reality: Over 10 years, currency fluctuations can swing returns by 2-3% annually. In 2026, the dollar is strong, but that could reverse. If you're investing for retirement 20+ years out, currency risk tends to even out, but it's not guaranteed. For shorter horizons (5-10 years), consider currency-hedged ETFs like HEDJ or DXUS, which cost around 0.35% ER.

Myth: 'Emerging markets are too risky'

Reality: They are riskier, but the potential reward is higher. In 2026, the MSCI Emerging Markets Index has a P/E ratio of around 12, compared to 20 for the S&P 500 (MSCI, 2026 Index Data). That's a 40% discount. However, political risk (e.g., China-Taiwan tensions) can cause sudden drops. Limit emerging markets to 10-20% of your international allocation.

Myth: 'I can just buy a US fund that invests internationally'

Reality: Many US-based multinationals (like Apple, Microsoft) get 40-60% of revenue from overseas. But that's not true international diversification — you're still exposed to US market risk. A true international ETF holds companies that are primarily listed and operate outside the US. The correlation between US and international stocks is around 0.70, meaning they don't move in lockstep, which is the whole point of diversification.

The CFPB has warned about misleading marketing of international funds that hide currency risks. In 2026, the SEC fined two firms for failing to disclose the impact of currency hedging on returns (SEC, Enforcement Action 2026).

State rules vary: California and New York have higher state income taxes, which can affect the net benefit of the foreign tax credit. In Texas and Florida (no state income tax), the credit is more straightforward.

For more on handling IRS notices related to foreign investments, see How do I Respond to an Irs Notice While Living Abroad.

In short: Watch for withholding taxes, currency risk, and index differences — they can cost you hundreds per year.

✅ Best for: Long-term investors (10+ years) who want true diversification. High-income earners who can use the foreign tax credit.

❌ Not ideal for: Short-term traders (under 3 years) who can't absorb currency swings. Investors who don't want to file Form 1116 for the foreign tax credit.

The math: A $100,000 portfolio with 30% international (VXUS) vs. 100% US (VTI) over 5 years. Assuming US returns 8% and international returns 6% (due to dollar strength), the US-only portfolio would be worth ~$146,900 vs. ~$140,300 for the mixed portfolio — a difference of around $6,600. But over 20 years, if international catches up (as it has historically), the mixed portfolio could outperform by $10,000-$20,000.

What to do TODAY: Open a brokerage account at Fidelity or Vanguard. Set up a recurring $100 monthly investment into VXUS or IXUS. In one year, you'll have $1,200+ invested globally. How do I Roll Over a 401k when Changing Jobs can help if you're consolidating accounts.

In short: International investing is worth it for most long-term investors, but requires a 10+ year horizon and tolerance for currency swings.