Easy and Critical Diversification for Your Portfolio

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some international stocks to your portfolio, the iShares Core MSCI Total International Stock Index ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a very low 0.16%, and it recently yielded 3.3%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF is too new to have a sufficient track record to assess. But as it contains more than 3,000 of the world's biggest companies, we can expect it to generally move in line with the overall world market, though not matching its returns exactly. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why international companies?
It's a smart idea to diversify your holdings not only by market size and industry, but also geographically. If the U.S. economy stalls or slides, other economies may still be performing well and could help offset losses in your portfolio. Many of the companies in this ETF are quite large and pay dividends. That should be welcome, as dividends can be quite powerful. Internationally reaped ones can be a little more complicated than domestic ones, though.

More than a handful of international companies had strong performances over the past year. Australia-based Westpac Banking , for example, soared 54% -- and still yields a fat 5.4%. It's been hampered, though, by the slowdown in China, as China uses many commodities produced by Australia. Some worry about a housing slowdown hurting the company, too.

U.K.-based alcoholic-beverage specialist Diageo , meanwhile, jumped 32%, as it invests more in China and introduces is Alexander & James e-commerce website. The company is financially strong and growing both its revenue and dividend, and aiming to turbocharge its growth via emerging markets.

Spain-based Banco Santander gained 12% and recently yielded 9.3% as well. It has been hurt by troubles in Europe, but the company actually does a lot of its business in Latin America, where it benefits from faster economic growth rates, such as Brazil's. It may be a while before all its operating regions are healthy, but while investors wait, they can collect a hefty payout -- which, even if halved, would still be significant. Some value-oriented investors see it as undervalued as well.

Other companies didn't do as well last year but could see their fortunes change in the coming years. BP was roughly flat and yields 5.2%. The price that BP will ultimately pay for the Deepwater Horizon debacle is finally clearer, with the company paying $4 billion in criminal penalties. But it's now in civil court, with its ultimate costs still unknown. The company's recently reported quarter featured profits down 19%, largely because of lower production due to asset sales, but it has been profiting handsomely from investments in Russia. Some see the stock as attractive now, with its performance expected to improve and its plans to buy back up to $8 billion worth of stock. It still carries significant debt, though.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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The article Easy and Critical Diversification for Your Portfolio originally appeared on Fool.com.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool recommends Diageo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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