Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice on a wide range of topics, including strategies for international stock markets. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “Foreign investments can strengthen your portfolio and here are 3 ways you can do it with less risk.”

We believe most investors could benefit from holding some foreign investments in their portfolios for added diversification. And fast-growing markets like China and India have positive long-term outlooks. Their populations are generally younger than those in North America, and rising incomes are helping more of them advance into the middle class.

Still, investing internationally remains riskier than investing in North America. Many stock markets in emerging countries have language barriers, uncertain investor-protection laws, and a less pronounced commitment to openness, fairness and other qualities we tend to take for granted in established markets.

But there are 3 ways you can diminish these potential pitfalls and make it easier to profit from foreign markets:

1. International exchange-traded funds (ETFs): Exchange-traded funds offer investors more benefits than ever before, mainly because of increased competition. That can make ETFs good choices for certain parts of your portfolio &$8212; such as the portion you devote to international investing.

   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.

   A good example of an international exchange-traded fund is the ISHARES FTSE/XINHUA CHINA 25 INDEX FUND (New York symbol FXI) which we analyzed in a recent issue of Canadian Wealth Advisor, our newsletter on conservative investing. This ETF aims to track the FTSE/Xinhua China 25 Index, which is made up of the 25 largest and most liquid Chinese stocks. All of the stocks in the index trade on the Hong Kong exchange. Some also trade as American Depositary Receipts (ADRs) on the New York exchange.

   The fund’s top holdings are China Construction Bank, 9.6%; China Mobile, 9.4%; Industrial & Commercial Bank, 8.8%; CNOOC, 6.5%; Bank of China, 6.2%; Agricultural Bank of China, 4.5%; China Overseas Land & Investment, 4.2%; China Pacific Insurance, 4.2%; China Petroleum and Chemical; 4.1%; and PetroChina, 3.9%.

   The fund’s holdings give it the following industry breakdown: Financials, 59.2%; Telecommunications, 15.7%; Oil and Gas, 14.5%; Basic Materials, 8.9%; and Industrials, 2.1%. Its expense ratio is 0.74%.

   China’s economy grew at a rate of 9.2% in 2011. It slowed to 7.8% in 2012, but it is now forecast to grow by 8.2% in 2013.

   As big as these Chinese companies are—and as well-known as many of them have become—investing in them through the Hong Kong exchange can be difficult for many Canadian investors. This ETF is a simple and uncomplicated way to tap into the world’s second-largest economy.

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2. Blue-chip U.S. companies: A simple way to gain international exposure at lower risk is to invest in U.S. stocks with international operations. Many of the best blue-chip stocks in the U.S. have large customer bases in fast-growing foreign countries. This lets them benefit from a recovering global economy, as well as a return to prosperity in the U.S.

   Now is a great time to add high-quality, multinational U.S. stocks to your portfolio.

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 your international investing 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.

   You’ll need to be highly selective with these investments. Yet they can help you cut risk, because American Depositary Receipts must follow some U.S. Securities and Exchange Commission and New York Stock Exchange rules. Two examples of recommendations of ours that trade as ADRs are Japanese carmaker Honda Motor Co. (symbol HMC on New York), and BHP Billiton (symbol BHP on New York), the giant Australian resources firm.

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

Have you held international investments in your portfolio for most of your investing career? In what form do you buy them? Have you changed the way you approach foreign investments over the years? Let us know what you think.