Why are expenses so much higher in international stock funds than in U.S. stock funds?

Paul's Answer:

In broad terms, the farther you stray from home, the more expensive it becomes to obtain reliable information, do business and keep up to date on trends and events that affect your investments. Investing in emerging markets is even more expensive than investing in international stocks.

According to Morningstar, the average expense ratio in foreign stock funds is about 1.7 percent, higher than the average for any category of domestic stock funds, including small-cap.

Foreign stock managers may have to spend heavily on travel. They may maintain a network of foreign offices or extensive contacts with people who are already on the scene.

Foreign companies don't provide the regular, consistent financial data that U.S. companies do.

Overseas, fund managers have more risk factors to deal with. For instance, we take the political stability of the United States for granted as a given. But this cannot be assumed everywhere in the world.

Overall, investing overseas requires considerably more time and research than investing in the United States.

Operating expenses escalate in an international fund due to the relative inefficiency of foreign capital markets. Transaction costs are higher. Taxes are higher. Foreign currencies are always a factor. Foreign banks often charge more for both routine and specialized transactions. And some international securities have significant custodial fees not found in U.S. stocks.

However, you don't have to pay high expenses to get a good international stock fund, even one with active management. Here are three examples: TIAA-CREF International Equity (TIINX), T. Rowe Price International Stock (PRITX) and Hotchkis & Wiley International (HWINX). According to Morningstar, their expense ratios are 0.49 percent, 0.85 percent and 0.89 percent, respectively. Index funds also have below-average expenses. Vanguard's European Stock Index (veurx) has an expense ratio of 0.29 percent.