Profiting from the global stock market has never been easier for investors

High-quality stocks in the global stock market are a great way to diversify your portfolio. Moreover, many emerging markets, like China and India, have strong growth prospects. That’s because their population is generally younger than North Americans, and more of them have the potential to advance into the middle class.

Even so, global stock markets remain riskier than investing in North America. That’s because many emerging countries have weak investor-protection laws, language barriers, less commitment to openness, fairness and so on.

Here are 3 simple ways to tap into global stock market profits at lower risk:

1. International exchange-traded funds (ETFs): Exchange-traded funds offer investors more benefits than ever before, mainly because of increased competition. That can make them good choices for certain parts of your portfolio—such as the portion you devote to global stock market investing. A good example of an international exchange-traded fund is iShares MSCI Germany Fund (symbol EWG on New York), which we cover in our Canadian Wealth Advisor newsletter.

Exchange-traded funds mirror the performance of a stock-market index or sub-index. They hold a more-or-less fixed selection of securities that are chosen to represent the holdings that go into the calculation of the index or sub-index.

Exchange-traded funds trade on stock exchanges, just like stocks. Investors can buy them on margin or sell them short. The best exchange-traded funds offer well-diversified, tax-efficient portfolios with exceptionally low management fees. They are also very liquid.

Before buying foreign ETFs you should know:

• Foreign ETFs can be volatile, even with the diversification they offer.
• Know how broad the fund is, so you can determine its volatility. The broader the ETF, the less volatility it will likely have.
• Know the economic stability of countries when investing in international ETFs.
• Know the liquidity of ETFs you invest in.
• Determine if the ETFs you buy will include capital gains distributions.
• Consider buying ETFs in a lump sum rather than small purchases to avoid high brokerage fees.

2. Blue-chip U.S. companies: As a Canadian, a simple way to gain exposure in the global stock market while lowering your risk is to invest in U.S. stocks. We advise keeping around, say,  25% of your portfolio in U.S. stocks, or ETFs that hold them. That’s because many blue-chip U.S. stocks have operations in many countries. This will let them benefit from a rebounding global economy, as well as a return to prosperity in the U.S.

We think that some of the best blue chip companies are the ones that pay dividends. Dividends are a sign of investment quality. Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies are hardly ever dividend paying stocks. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

We like dividend paying stocks because they can grow. Stock prices rise and fall. Interest on bonds holds steady at best. But dividend paying stocks like to ratchet their dividends upward—hold them steady in bad years, raising them in good ones. That also gives you a hedge against inflation.

3. New York American Depositary Receipts (ADRs): An American Depositary Receipt is an investment unit for foreign companies that trade on a U.S. stock market. These units can represent fractions of shares, whole shares, or multiple shares in the foreign company. ADRs can help you simplify investing in the global stock market by letting you buy foreign shares on U.S. exchanges without the complications of buying or selling on a foreign exchange, in a foreign currency.

These investments also help you cut risk, because American Depositary Receipts have to follow some U.S. Securities and Exchange Commission and New York Stock Exchange rules. Toyota (symbol TM on New York) and Sony (symbol SNE on New York), are two examples of foreign firms that trade as American Depositary Receipts on the New York Stock Exchange. We cover both stocks in our Wall Street Stock Forecaster newsletter.

Investors should note that depositary banks that issue ADRs sometimes charge fees for their services, and deduct these fees from the dividends and other distributions on the ADRs. The depositary bank also incurs expenses for services such as converting foreign currency into U.S. dollars, and passes these costs on to ADR holders. Sometimes, however, the foreign company pays the fees in return for the exposure to the U.S. market.

Now that you know the three ways to profit from global stock markets, are you likely to use them to invest? Do you use another method to invest in the global stock market? Share your experience with us in the comments section.