E*Trade Launches Global Trading in Local Currencies

E*Trade is launching a new platform on Tuesday that will allow investors to trade from their desktops in six foreign markets around the globe, including Canada, France, Germany, Hong Kong, Japan and the U.K. Investors will also be able to trade those countries’ currencies online.

“Demand for international investing continues to rise dramatically in the U.S.,” Jarrett Lilien, E*Trade’s president and chief operating officer, told CNBC. “If you look at the last few years, the money going into international funds has outstripped that going into U.S. funds.”

Indeed. Of the $157.9 billion that U.S. investors put in stock funds last year, a whopping 93% landed in funds that invest primarily overseas, up from 77% in 2005 and nearly 38% in 2004, says the Investment Company Institute.  Put another way, investors allocated 22% of their portfolios to international stocks last year, up from 15.7% in 2004.

The attraction is at least partly fueled by impressive returns. International indexes have surpassed their domestic counterparts - by more than double - for the past five years.

While E*Trade isn’t the first online brokerage to provide access to foreign stocks, it’s one of the pioneers that allows online trading in stocks' home currencies. Fidelity allows its online investors to trade in stocks in 36 countries; transactions are completed in dollars. Charles Schwab, TD Ameritrade and traditional brokerages like Smith Barney also can connect investors with foreign shares, but it must be done through a broker or over the phone, which typically means higher commissions.

E*Trade will charge about $20 for foreign trades, but investors will be charged in the currency they’re trading in.

Here’s how it works: Investors will convert their U.S. dollars into the currency the stock trades in -- and then execute as they would with any normal trade. After selling the shares, investors can convert back into U.S. dollars. Currency conversions fees also apply, ranging from .25% of the amount converted to 2.25%, depending on the size of the transaction.

As such, investors will have access to foreign stocks that don’t trade on U.S. exchanges, from Vivendi and Toyota to the Bank of China, Lilien says. They’ll have access to real-time stock quotes –- that’s real time for the stock’s locale -- in all of the markets except for Hong Kong, where they will be delayed by at least 20 minutes. Investors will also be able to trade the country’s currencies, including the U.S. dollar; the Canadian dollar; British pound sterling; euro; and the Hong Kong dollar. The online brokerage may expand to include up to 42 international markets and their related currencies.

Before diving in, investors need to consider the implications and their other investment options to see what best fits their investment goals. The impact of currency conversions – and the related fees – complicates matters. While investors may stand to benefit from currency exchanges in some countries, they can also lose in others.

“It can get too complicated for your average retail investor,” said Adam Honore, online brokerage analyst with Aite Group, a research and consulting firm focusing on the financial services industry.

That’s why novice investors might consider an easier method: investing in a diversified basket of foreign stocks through the large number of international mutual funds or exchange-traded funds, which resemble index-tracking mutual funds but trade just like stocks. And those seeking exposure to specific companies might research ADRs, or American depositary receipts, which are dollar-denominated securities that represent foreign stocks but trade on a U.S. exchange. One downside of ADRs, E*Trade’s Lilien says, is that some tend to be illiquid.

Adding a slice of international investments to a portfolio – beyond U.S. companies doing business abroad -- will help enhance returns while reducing long-term volatility and risk, financial advisors say.

Individuals should invest about 25% to 30% of the stock portion of their portfolio in international equities, says Ibbotson Associates, a unit of Morningstar that specializes in investment strategies. (Keep in mind this doesn’t mean emerging market investments. These volatile investments should comprise no more than 10% of one’s total international allocation, Ibbotson says).

Take an investor with a moderate tolerance for risk and a $100,000 portfolio. If they had 60% of their portfolio, or $60,000, invested in stocks, they might allocate $15,000 to $18,000 of that to international stock funds, exchange-trade funds, individual issues -– or some combination thereof.  A specific allocation will depend on one’s age, time horizon, and investment goals.

E*Trade’s new platform is being rolled out to a limited number of investors, but will be widely available in the second quarter.

Tara Siegel Bernard is a News Editor for CNBC. She can be reached at .

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