International Funds Overview
International Funds Overview
Approximately 60% of the world's stock market value sits outside the United States. Ignoring it concentrates your portfolio and misses diversification.
Key takeaways
- Developed international markets (Europe, Japan, Canada) offer similar stability to US markets with different economic cycles
- Emerging markets (China, India, Brazil) carry higher volatility but potentially higher long-term returns
- VXUS and VEU provide US-domiciled exposure to developed and emerging markets; VWRL is a British-domiciled global option
- International diversification reduces overall portfolio volatility by adding uncorrelated returns
- Currency fluctuations create noise but don't change the fundamental case for global diversification
Why international matters
The United States represents roughly 60% of global stock market value as of 2024. That means 40% of opportunity (by market value) sits overseas. If you own only US stocks, you are making an implicit bet that US companies will outperform the rest of the world indefinitely.
This bet is not well-supported historically. There are long stretches where the US market leads, and other stretches where international markets lead. From 1970 to 1989, US stocks significantly outperformed. From 1990 to 2010, it was closer, with international having several leading periods. From 2010 to 2020, the US strongly outperformed again. Looking forward is impossible, so the diversification case is not about prediction—it's about not putting all eggs in one geographic basket.
International stocks also provide some diversification benefit. Their business cycles, currency movements, and regulatory environments differ from the US. A market downturn in Europe might not coincide with a US downturn (though correlation has increased in recent decades). By owning both, you reduce the severity of any single region's downturn.
Developed versus emerging markets
International stocks divide into two broad categories: developed markets and emerging markets.
Developed markets include Canada, Western Europe (UK, France, Germany, Switzerland, Italy, Netherlands, Scandinavia), Japan, Australia, and New Zealand. These countries have mature economies, political stability, and developed financial systems. Vanguard's International Developed Market Index Fund (VXUS) allocates roughly 40% to developed markets ex-US, with Europe being the largest region (roughly 20% of VXUS) and Japan the second-largest (roughly 10%).
Emerging markets include China, India, Brazil, Taiwan, Mexico, and dozens of smaller markets. These economies are growing faster than developed markets on average but carry higher political risk, currency volatility, and lower regulatory protections for investors. Emerging markets represent roughly 10-15% of a global market-cap weighted portfolio, so they're a meaningful but not dominant allocation.
The split within VXUS is roughly 60% developed markets ex-US and 40% emerging markets, reflecting current market values. VWRL (held outside the US due to regulatory differences) uses a similar global market-cap weighted approach.
The fund options
VXUS (Vanguard FTSE All-World ex-US ETF): This is the US-listed option for owning international stocks ex-US. It holds about 6,000 stocks across developed and emerging markets, weighted by market capitalization. Expense ratio is approximately 0.08%, slightly higher than VTI (0.03%) due to higher underlying costs and currency hedging complexity.
VEU (Vanguard FTSE Developed Markets ETF): This holds only developed markets (no emerging markets), with roughly 1,500 stocks. If you want to avoid emerging market exposure or want separate control over EM allocation, VEU provides that flexibility. Expense ratio is approximately 0.05%.
VWRL (Vanguard FTSE All-World UCITS ETF): This is a British-domiciled ETF holding both US and international stocks (truly global), weighted by market cap. If you're based outside the US, VWRL is often more accessible than US-listed funds. It includes the US (about 55% of weight) plus developed and emerging international markets.
VTIAX: Vanguard's mutual fund equivalent to VXUS, with identical holdings and similar expense ratio. Choose based on your account type and broker.
Other providers offer similar funds. Fidelity's FTIHX and Schwab's SWISX provide international developed markets exposure with low costs. The key is finding a fund with low expense ratio (under 0.15%) and broad diversification.
Currency considerations and hedging
International funds face currency risk: changes in exchange rates affect returns. When the dollar strengthens against the euro, a European stock that rose in local currency might deliver lower returns in dollar terms.
Some international funds offer "hedged" versions that try to eliminate currency fluctuations. A hedged version uses currency forwards or options to lock in the exchange rate. This reduces currency volatility but costs roughly 0.20-0.30% in additional expenses annually.
For a long-term investor, currency hedging is usually not worth the cost. Currency fluctuations are noise over multi-decade periods. Sometimes they help (dollar weakness), sometimes they hurt (dollar strength), and they average out over time. The cost of hedging exceeds the benefit. For this reason, unhedged versions (VXUS, not VXUS-H) are preferable for most buy-and-hold investors.
Allocation strategy
A common starting point is to allocate international stocks at roughly their global market weight. If US stocks are 60% of global markets and international is 40%, a 60-40 split between US and international in your stock allocation mirrors the global market.
This allocation looks like:
- 60% VTI or VTSAX (US)
- 40% VXUS or VTIAX (International)
For someone with a total stock allocation of 60% (the rest being bonds), this means 36% VTI and 24% VXUS in their total portfolio.
A simpler approach for hands-off investors is to use a global fund like Vanguard's VT (Total World Stock ETF), which holds US and international in global market-cap weights. VT costs 0.07% and eliminates the need to rebalance between US and international. Over time, it drifts slightly (US might grow to 65% or shrink to 55%), but rebalancing back to global weights happens naturally as your regular contributions continue.
Why international has underperformed recently (and why that doesn't matter)
From 2015 to 2025, US stocks significantly outperformed international stocks. The S&P 500 returned roughly 12% annualized while developed international markets returned roughly 5% annualized. This gap made international exposure feel like a drag on returns.
There are specific reasons for this recent gap: US tech dominance (Magnificent 7 stocks like Apple, Microsoft, Nvidia), a strong dollar, and higher growth expectations for the US. But these are not permanent. Japan significantly outperformed the US from 1980 to 1990. Europe led from 1995 to 2005. Extrapolating recent performance forward is a mistake that has burned many investors.
The diversification argument for international stocks is not about chasing recent outperformance. It's about not betting everything on the US. A diversified portfolio including international stocks will have years where international drags on returns and years where it leads. Over a 30-year career, this diversification reduces overall volatility and improves risk-adjusted returns even if absolute returns are similar.
How developed and emerging markets interact
Emerging market specifics
Within emerging markets, China and India are the largest weights (roughly 3-4% and 2-3% of VXUS respectively). Taiwan, Brazil, Mexico, and other markets make up the remainder.
Emerging markets carry higher risks: political instability, capital controls, corporate governance issues, and currency crises are all possibilities. A 30-40% decline in emerging markets during a regional crisis is not uncommon (Brazil fell 40% from 2011 to 2016 for various macro reasons). But they also offer higher growth potential. India's nominal GDP growth, for instance, has averaged 9-10% annually over the past decade, providing tailwinds for stock returns.
For most investors, emerging market exposure through a broad fund like VXUS (which holds all emerging markets at market weights) is appropriate. Concentration in individual emerging markets is speculative.
Tax treatment and accounts
International dividends are subject to withholding taxes (typically 15% under tax treaties). These withholdings are generally unavoidable, though some countries have lower rates with the US.
In a Roth IRA or 401(k), foreign withholding taxes are permanent (you can't claim credits), which makes retirement accounts less efficient for international stocks (they'd be more tax-efficient in a taxable account where you can claim foreign tax credits). However, this difference is small—roughly 0.10-0.15% annually—and shouldn't drive allocation decisions. Most investors benefit from keeping their allocation consistent across account types for simplicity.
Related concepts
Next
International stocks and US stocks form the equity core of most portfolios, but bonds are equally important. The next section covers bond funds—what they hold, how they differ from stock funds, and how to think about the stock-bond allocation decision.