What are ETFs?

Exchange-traded Funds (or ETFs) are a type of fund/security that involves a number of financial securities such as stocks, bonds, etc. that are oftentimes tracked in an underlying index. 

What are International ETFs

International Exchange-Traded Funds (or otherwise known as frontier markets) are a type of exchange-traded fund/security that mainly focuses on foreign-based investments. The type of focus can vary from the broker providing International ETFs such as global, regional, or a specific country. At times, International Exchange-Traded Funds can contain equities or fixed-income securities.   

International Exchange-Traded Funds are often popular with investors who use the strategy of passive investing with benchmark indexes. Different fund managers tend to provide different indexes. More popular Exchange-Traded Funds or those from highly developed countries usually invest in hundreds of companies, providing a strong diversification in a portfolio.

How do International ETFs work?

ETFs are the same as traditional mutual funds where Authorized Participants act as a broker to buy and sell Exchange-Traded Funds. After a trading session, ETFs providers forward a portfolio composition that acts as a blueprint on how to assemble or disassemble its ETF. When in the context of a buy action, when a buyer’s share amount surpasses the shares acquirable in the market, the Authorized Participants will purchase the underlying securities that encompass the ETF and take the shares to the ETF provider. With the action complete, the Authorized Participants receive the ETF shares that are transferred to the buyer. 

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International Exchange-Traded Funds are different from the traditional mutual fund in that the markets that trade in its underlying securities are often closed. For an Authorized Participant to accommodate trade in ETFs, they would often keep an inventory of ETF shares. With the shares, they could hedge exposure through a variety of instruments such as futures, shorting the underlying basket of stocks, or other similar ETFs.

However, if an Authorized Participant were to have insufficient ETFs in the inventory, the prices for the buyer would be based on where the Authorized Participant would expect the securities can be bought the next market session. Price quotes are often determined through many factors and reference points such as market news, currency market versus the U.S. Dollar, stamp taxes and exchange fees, and American Depositary Receipts commonly issued by U.S.-based banks.  

While the handling of international Exchange-Traded Funds in the U.S. holds many similarities with domestic ETFs, an element that stands, in contrast, is the process of creating and redeeming such ETFs.