Q: Pat, a socialist president was elected in France and Greece took another turn for the worse. Is it time to be taking some money out of the stock market?

Pat McKeough: I don’t think so. I think that short-term approach in reacting to really random sort of events is apt to cost you money in the long run. Especially now—the stock market has been basically depressed for 13 years. It hasn’t really done much for 13 years.

The last time it did anything like that was in the mid-60s through the early 80s and when it finally got going it really took off. I think we’ll see something like that sometime, maybe next year, maybe five years from now. I don’t know, but I think now that we’re looking at relatively modest risk and a lot of upward potential. The thing is we don’t know when things are going to change, because there’s that random element in the stock market.

But to get back to your question: we’ve been living with these fears since last year and beyond, and people are waiting for the other shoe to drop. And that’s not the same as being surprised by a development, like the fall of Lehman Brothers, for example.

So just to answer your question then, long-time investors should hang on to a portfolio of well-established stocks that work for them with the right degree of risk for their temperament and their objectives.

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Do you get an urge to sell when the stock market falls sharply for days at a time? Did you ever get the urge to sell just before the market was set to turn around and rise? If you have sold in response to scary headlines, how long did you wait before you went back in the market? Did you buy back in at a lower or higher price? Let us know what you think in the comments section below. Click here.

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 the best strategies to use in 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: “There are 3 convenient ways to invest in foreign growth without getting out of your comfort zone.”

We think most investors should hold some foreign investments in their portfolios for maximum diversification. Moreover, many 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 on international stock markets 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 you can avoid these potential pitfalls when you follow these 3 ways 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 — 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 iShares MSCI Germany Fund (New York Exchange symbol EWG), which we analyzed in the latest issue of Canadian Wealth Advisor. This ETF tracks the stocks in the MSCI Germany Index. This index aims to replicate 85% of the total market capitalization of the German stock market. The remaining 15% is unavailable for investment, partly due to limitations on foreign ownership. The fund’s top holdings are Siemens AG (engineering conglomerate), 9.2%; BASF (chemicals), 8.9%; SAP (software), 6.9%; Bayer (diversified chemicals), 6.4%; Daimler AG (automobiles), 6.4%; Allianz (insurance), 6.2%; Deutsche Bank AG, 4.9%; E.ON (energy), 4.6%; Deutsche Telekom, 3.7%; and BMW AG (automobiles), 3.5%.
   
   As big and well-known as these German companies are, investing in them through the Frankfurt exchange can be difficult for many Canadian investors. The ETF is a simple and uncomplicated way to tap into Europe’s strongest 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.
   
   With the Canadian dollar now above parity with the U.S. dollar, there’s never been a better 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 have to 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 Honda Motor Co. (symbol HMC on New York), and Switzerland-based Diageo (symbol DEO on New York), the British-based giant in alcoholic beverages.

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In the six months ended December 31, 2011 (Diageo’s fiscal year ends June 30), the company’s revenue rose 8.2%, to 5.8 billion pounds from 5.3 billion pounds a year earlier (1 British pound = $1.57 Canadian). Due to an unusual tax charge, earnings per ADR fell 20.3%, to 1.53 pounds from 1.92 pounds a year earlier (each American Depositary Receipt represents four Diageo common shares). Without this charge, earnings would have risen 16.0%.

Diageo is a buy.

Pat McKeough responds to many personal questions on specific stocks and other investing topics from the members of his Inner Circle. Every week, his comments and recommendations on a selection of the most intriguing questions of the past week go out to all Inner Circle members. And every Friday, we offer you one of the highlights from these Q&A sessions.

This week, one Inner Circle member asked about one of the largest telecommunications firms on the world stock market. Pat looks at the prospects and potential pitfalls ahead for a company that seeks to expand its presence in international markets.

Q: Pat: I have been looking at Telefonica. About two-thirds of their business is outside Spain, with a good part in Brazil, and it seems to be growing. I think it’s a hidden gem. Your view?

A: Telefonica SA (ADR, symbol TEF on New York; www.telefonica.com), provides a range of telecommunications services, including telephone, mobile, Internet, data and entertainment. Telefonica mainly operates in Spain, Portugal and a number of Latin American countries.

In July 2011, the company started implementing its plan to lay off 20% of its Spanish workforce (or 6,500 workers) over three years. It will also cut other costs in Spain and use these savings to increase its investments in Latin America, particularly Brazil.

The company has 231.9 million wireless subscribers, 40.4 million traditional telephone (or land line) customers, 19.0 million Internet users and 3.2 million pay TV subscribers.

Telefonica’s growing Latin American operations have helped offset weakness in Spain and Europe. The weaker euro is also enhancing the Latin American business’s contribution.

Telefonica now gets 46% of its sales from Latin America, followed by Spain (28%) and the rest of Europe (26%).

World stock market: Telefonica expands its partnership in China

The company has also expanded its alliance with China Unicom, the second-largest wireless carrier in China. In October 2009, the companies bought $1 billion of each other’s stock. In January 2011, they bought a further $500 million of each other’s shares.

These share purchases increased Telefonica’s stake in China Unicom to 9.7%; China Unicom now holds 1.4% of Telefonica.

In December 2011, Telefonica announced its first dividend cut in a decade. The 2012 cash dividend will amount to 1.30 euros per share, down 18.8% from 1.60 euros in 2011. The ADRs still yield a high 9.8%, based on the new rate.

In the latest Inner Circle Q&A, Pat looks at the risk posed by Telefonica’s relatively high debt. He also examines just what impact Telefonica’s initiative in the Chinese wireless market could have on the company’s future growth. He concludes with his clear buy-hold-sell advice.

Inner Circle members see Pat’s analysis and recommendations on the stocks that other members have asked about in each week’s Inner Circle Q&A. You can view it immediately when you become a member of this unique investment group. You will get Pat McKeough’s answers to your personal investment questions, full access to our members-only Inner Circle website, and many other membership privileges. Click here to get started right away.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

ETFs trade on stock exchanges, just like stocks. Prices are quoted in newspaper stock tables and online. You’ll have to pay brokerage commissions to buy and sell ETFs. However, ETFs’ low management fees still give them a cost advantage over most conventional mutual funds.

As well, shares are only added or removed when the underlying index changes. As a result of this low turnover, you won’t incur the regular capital gains bills generated by the yearly distributions most conventional mutual funds pay out to unitholders.

Below we update our advice on six ETFs—five buys and one we don’t recommend.

ISHARES S&P/TSX 60 INDEX FUND $17.91 (Toronto symbol XIU; buy or sell through brokers; ca.ishares.com) is a good, low-fee way to buy the top stocks on the TSX. The units are made up of stocks that represent the S&P/TSX 60 Index, which consists of the 60 largest, most heavily traded stocks on the exchange. Expenses are just 0.17% of assets.

Most of the stocks in the index are high-quality companies. However, as it must ensure that all sectors are represented, the fund holds a few we wouldn’t include.

The index’s top holdings are Royal Bank, 6.9%; TD Bank, 6.4%; Bank of Nova Scotia, 5.2%; Suncor Energy, 5.0%; Barrick Gold, 4.5%; Canadian Natural Resources, 4.0%; Potash Corp., 3.7%; Goldcorp, 3.6%; Bank of Montreal, 3.4%; CN Railway, 3.1%; BCE Inc., 2.9%; CIBC, 2.8%; Enbridge, 2.7%; TransCanada Corp., 2.7%; Cenovus Energy, 2.5%; and Manulife Financial, 1.9%.

iShares S&P/TSX 60 Index Fund is a buy.

ISHARES DOW JONES CANADA SELECT DIVIDEND INDEX FUND $21.01 (Toronto symbol XDV; buy or sell through brokers; ca.ishares.com) holds 30 of the highest-yielding Canadian stocks. Its selections are based on dividend growth, yield and payout ratio. The weight of any one stock is limited to 10% of its assets. The fund’s MER is 0.50%. It yields 3.9%.

The fund’s top holdings are CIBC, 6.6%; National Bank, 5.9%; Bonterra Energy, 5.8%; Bank of Montreal, 5.3%; TD Bank, 5.3%; AG Growth International, 4.7%; Royal Bank of Canada, 4.3%; Telus, 4.1%; and Bank of Nova Scotia, 4.1%.

The fund holds 54.3% of its assets in financial stocks. Utilities are next, at 20.5%. The top Canadian finance stocks have sound prospects. However, if you invest in this ETF, be sure to adjust the rest of your portfolio so it won’t be overly concentrated in the financial sector.

iShares Dow Jones Canada Select Dividend Index Fund is a buy.

SPDR S&P 500 ETF $132.47 (New York symbol SPY; buy or sell through brokers; www.spdrs.com) holds the stocks in the S&P 500 Index, which consists of 500 major U.S. stocks that are chosen based on their market cap, liquidity and industry group.

The index’s highest-weighted stocks are Apple Inc. ExxonMobil, Microsoft, Procter & Gamble, Wells Fargo & Co., Johnson & Johnson, IBM, Chevron, General Electric, Pfizer Inc., Coca-Cola Co. and AT&T.

The fund’s expenses are just 0.10% of its assets.

If you want exposure to the S&P 500 Index, the SPDR S&P 500 ETF is a buy.

SPDR DOW JONES INDUSTRIAL AVERAGE ETF $126.91 (New York symbol DIA; buy or sell through brokers; www.spdrs.com) holds the 30 stocks that make up the Dow Jones Industrial Average.

The fund’s top holdings are IBM, ExxonMobil, Chevron Corp., 3M, Johnson & Johnson, McDonald’s Corp., Coca-Cola Co., Caterpillar Inc., United Technologies and Boeing Inc. The fund’s expenses are about 0.18% of its assets.

SPDR Dow Jones ETF is a buy.

POWERSHARES QQQ ETF $61.02 (Nasdaq symbol QQQQ; buy or sell through brokers; www.invescopowershares.com), formerly called Nasdaq 100 Trust Shares, holds the stocks that represent the Nasdaq 100 Index. That index is made up of the 100 largest shares on the Nasdaq exchange, based on market cap.

The Nasdaq 100 Index contains shares of companies in a number of major industries, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies. The fund’s expenses are about 0.20% of its assets.

The index’s highest-weighted stocks are Apple, Microsoft, Qualcomm, Google, Cisco Systems, Intel, Amazon.com, Oracle Corp., Comcast Corp. and Amgen Inc.

PowerShares QQQ ETF is a buy for aggressive investors only.

ISHARES MSCI CANADA INDEX FUND $28.36 (New York symbol EWC; buy or sell through brokers; ca.ishares.com) is like a market cap-based index fund, but its managers try to improve its performance by tinkering with the index fund formula. They do this through their Morgan Stanley Capital International Canada Index. The fund has an MER of 0.52%.

The index’s top holdings are Royal Bank, 6.1%; TD Bank, 5.6%; Bank of Nova Scotia, 4.5%; Suncor Energy, 4.4%; Barrick Gold, 4.0%; Canadian Natural Resources, 3.5%; Potash Corp., 3.3%; Goldcorp, 3.2%; Bank of Montreal, 3.0%; CN Railway, 2.8%; and CIBC, 2.5%.

If you want to own a Canadian index fund, you should buy the iShares S&P/TSX 60 Index Fund. You’ll pay about a third of the management fees.

We don’t recommend iShares MSCI Canada.

ISHARES S&P INDIA NIFTY 50 INDEX FUND $20.44 (Nasdaq symbol INDY; buy or sell through brokers; us.ishares.com) is an ETF that aims to track the S&P CNX Nifty Index, which represents the 50 largest, most liquid Indian securities.

The fund’s top holdings are Infosys Technologies (software), 9.5%; Reliance Industries Ltd. (conglomerate), 8.4%; ITC Ltd. (conglomerate), 7.7%; Housing Development Finance, 6.3%; ICICI Bank, 5.7%; HDFC Bank, 5.6%; Tata Consultancy Services Ltd. (information technology), 4.2%; Larsen & Toubro Ltd. (conglomerate), 3.9%; Hindustan Unilever Ltd. (consumer products), 3.1%; and State Bank of India, 3.0%.

The fund’s industry breakdown includes: Banks, 17.0%; Computers, 15.9%; Refineries, 8.8%; Cigarettes, 7.7%; Finance: Housing, 6.3%; Automobiles, 5.4%; Pharmaceuticals, 4.5%; Power, 4.3%; Engineering, 3.9%; and Oil Exploration, 3.3%. The fund has an expense ratio of 0.89%.

India’s economy has grown by more than 9% annually in the past few years. Growth slowed to 6.9% in the third quarter of 2011, but India could still expand by 7% in 2012.

iShares S&P India is a buy for safety-conscious investors willing to accept some risk.

ISHARES MSCI EMERGING MARKETS EASTERN EUROPE INDEX FUND $24.23 (New York Exchange symbol ESR; buy or sell through brokers), is an ETF that aims to track the MSCI Emerging Markets Eastern Europe Index. The fund’s geographic breakdown is as follows: Russia, 74.0%; Poland, 17.4%; Czech Republic, 4.3%; and Hungary, 3.5%.

The fund’s top holdings are Gazprom (Russia: gas utility), 21.0%; Lukoil (Russia: oil), 10.0%; Sberbank (Russia: bank), 7.9%; Novatek (Russia: natural gas), 4.2%; Rosneft Oil Company (Russia: oil and gas), 3.9%; Uralkali (Russia: potash), 3.7%; Mobile Tele-Systems (Russia: wireless), 2.8%; MMC Norilsk Nickel (Russia: mining), 2.7%; Tafneft (Russia: oil and gas); and CEZ AS (Czech Republic: utility), 2.2%. iShares MSCI Emerging Markets Eastern Europe Index Fund’s expense ratio is 0.68%.

The fund’s concentration in Russia adds risk, especially given its current political tensions. But the long-term outlook for resource prices, including oil and gas, is positive. That’s a big plus for Russia’s largely resource-based economy, which is forecast to grow by 3.5% in 2012.

iShares MSCI Emerging Markets Eastern Europe Index Fund is a buy for safety-conscious investors willing to accept some risk.

The fund’s top holdings include Samsung Electronics, Hyundai Motor Co., Posco (steel), Hyundai Mobis (auto parts), Shinhan Financial, Kia Motors, LG Chemical, KB Financial, Hyundai Heavy Industries and Hynix Semiconductor.

The South Korean stock market has seen little change since the death of North Korean leader Kim Jong-il on December 17, 2011, and the elevation of his son Kim Jong-un as leader.

North Korea’s nuclear weapons remain a threat, but the country needs the continued goodwill of China for food and military aid.

As well, the generals controlling the powerful military are unlikely to risk their favoured status in the nation of 23 million people by launching any serious attack on the south.

iShares MSCI South Korea Index Fund is a buy for aggressive investors.

Vanguard, which went into business in 1975, offers low-fee index mutual funds. Generally speaking, Canadians can’t buy units of mutual funds that are registered in the U.S., because they aren’t registered with provincial securities commissions. For that matter, some Canadian funds aren’t available in all provinces.

Canadians can, however, buy Vanguard exchange-traded funds (ETFs) that trade on stock exchanges. We don’t recommend all of Vanguard’s ETFs, but here are two we do see as low-fee buys.

VANGUARD EMERGING MARKETS ETF $39.22 (New York symbol VWO; buy or sell through brokers) aims to track the MSCI Emerging Markets Index, which is made up of common stocks of companies located in emerging markets around the world. The fund has an MER of 0.22%.

The fund’s top holdings are Samsung Electronics (South Korea: electronics), Petroleo Brasileiro SA (Brazil: oil and gas), Vale SA (Brazil: mining), Gazprom (Russia: gas utility), China Mobile (China: wireless), Taiwan Semiconductor (Taiwan: computer chips), America Movil SAB de CV (Latin America: wireless), China Construction Bank (China: banking), Itau Unibanco Holding SA (Brazil: banking), and Industrial & Commercial Bank of China (China: banking), CNOOC Ltd. (China: oil and gas) and MTN Group (South Africa: telecommunications).

The $56.3-billion Vanguard Emerging Markets ETF’s breakdown by country is as follows: China (17.1%), Brazil (15.4%), South Korea (14.9%), Taiwan (10.9%), South Africa (7.5%), India (7.4%), Russia (6.6%), Mexico (4.7%), Malaysia (3.4%), Indonesia (2.9%), Thailand (1.8%), Chile (1.7%), Poland (1.5%), Turkey (1.3%) and Other (0.9%).

Vanguard Emerging Markets ETF is a buy for aggressive investors.

VANGUARD GROWTH ETF $62.76 (New York symbol VUG; buy or sell through brokers) aims to track the MSCI U.S. Prime Market Growth Index, a broadly diversified index that mainly consists of stocks of large U.S. companies. Its MER is just 0.12%.

The $20.8-billion fund’s top holdings are Apple Inc., IBM, Google, Coca-Cola, Microsoft, Philip Morris International, Oracle Corp., Schlumberger, Wal-Mart and Cisco Systems

Vanguard Growth ETF is broken down by economic segment as follows: Information Technology (30.1%), Consumer Discretionary (17.0%), Industrials (12.6%), Consumer Staples (12.1%), Energy (9.4%), Health Care (9.3%), Financials (4.6%), Materials (3.4%), Telecommunication Services (0.8%) and Utilities (0.2%).

Vanguard Growth ETF is a buy.

However, the long-term outlook for China, and Chinese stocks, is bright. One of the best ways for investors to tap into that growth is through low-fee exchange-traded funds (ETFs).

Here are two Chinese ETF recommendations. One invests in all publicly traded Chinese stocks available to foreign investors. The other holds small-cap Chinese stocks.

SPDR S&P CHINA ETF $65.62 (New York Exchange symbol GXC; buy or sell through brokers; www.spdrs.com), is an exchange-traded fund that aims to track the S&P China BMI Index. This index is made up of all the publicly traded Chinese stocks that are available to foreign investors. Right now, SPDR S&P China ETF holds 177 stocks.

The $612.7-million fund’s top holdings are China Mobile, 7.8%; China Construction Bank, 7.5%; Baidu Inc., 5.1%; Industrial & Commercial Bank of China, 4.8%; CNOOC Ltd., 4.4%; PetroChina, 4.1%; Tencent Holdings Ltd., 3.0%; Bank of China, 3.0%; China Life Insurance, 3.0%; and China Petroleum & Chemical, 2.8%.

The fund’s breakdown by industry is as follows: Financials, 30.1%; Oil and Gas, 16.0%; Information Technology, 12.7%; Telecommunication Services, 11.0%; Industrials, 9.8%; Consumer Staples, 5.8%; Consumer Discretionary, 5.8%; Basic Materials, 4.9%; Utilities, 2.5%; and Health Care, 1.5%.

SPDR S&P China ETF was launched on March 19, 2007. It has a 0.59% MER, and yields 0.9%.

SPDR S&P China ETF is a buy for aggressive investors.

GUGGENHEIM CHINA SMALL CAP ETF $21.87 (New York Exchange symbol HAO; buy or sell through brokers; www.guggenheimfunds.com) aims to track the AlphaShares China Small Cap Index, which is made up of all investable Chinese stocks with market caps between $200 million and $1.5 billion.

The $150.3-million fund’s top holdings are Mindray Medical International, 2.2%; Tsingtao Brewery Co., 1.6%; Guangdong Investment, 1.6%; Zhaojin Mining Industry Co., 1.6%; Yingde Gases Group, 1.5%; Great Wall Motor Corp., 1.4%; China BlueChemical, 1.4%; Soho China, 1.3%; and China Everbright, 1.3%.

As China’s economy matures, domestic spending should continue to rise. As well, China’s leaders will likely need to increase spending on programs and services to ease the growing gap between the rich and poor. Guggenheim China Small Cap ETF is well-positioned to benefit from both of these trends.

The ETF was launched on January 30, 2008. It has an expense ratio of 0.70%, and a current yield of 2.0%.

Guggenheim China Small Cap ETF is a buy for aggressive investors.

The fund’s top holdings include BHP Billiton, 14.1%; Commonwealth Bank of Australia, 8.9%; Westpac Banking Corp., 7.8%; Australia and New Zealand Banking Group, 6.5%; National Australia Bank, 6.5%; Wesfarmers, 3.8%; Rio Tinto, 3.5%; Woolworths, 3.4%; Newcrest Mining, 3.0%; and Woodside Petroleum, 2.7%.

Australia benefits from its stable banking and political systems. It is also rich in natural resources, and its exports are in high demand in Asian markets, including India and China.

iShares MSCI Australia Index Fund is a buy for aggressive investors.