DCA and International Funds

A worker building wealth in the U.S. today has three geographic choices: U.S. stocks (40% of global equity value), developed-market international (35%), and emerging markets (25%). Dollar-cost averaging $500/month over 30 years compounds differently depending on which geography you choose. The answer: invest in all three via a globally diversified fund or a three-region DCA split.

Key takeaways

• U.S. stocks have dominated the past 30 years; global diversification reduced your return by 1–2% annually.
• An equal-weighted three-region portfolio (U.S., developed ex-U.S., emerging) would have returned 8–10%, vs. 10.5% for U.S. only.
• Future returns are uncertain; diversification is insurance against a shift in dominance.
• VTIAX (Vanguard Total International Stock Fund) includes both developed and emerging markets in one holding.
• DCAing into VTI and VXUS (or VTIAX) in a 60/40 U.S./international split is a proven approach.

The history: U.S. outperformance 1995–2024

From 1995 to 2024, the U.S. stock market delivered 10.5% annualized returns. The EAFE index (Europe, Australia, Far East) delivered 5.8% annualized. Emerging markets delivered 7.2%. A U.S.-only investor outperformed a globally diversified investor by 2–3% annually.

This is the primary reason U.S. investors have historically favored home-country bias. A $100,000 DCA contribution ($500/month for 200 months) invested in VTI (U.S. only) would have grown to approximately $3.2 million by 2024. Invested 60% VTI and 40% VTIAX (international), it would have grown to approximately $2.4 million—a $800,000 difference.

This difference explains why many U.S. investors ask: "Why diversify internationally at all if the U.S. dominates?"

The answer: historical accidents, not permanent dominance

U.S. outperformance from 1995 to 2024 was driven by:

1. Tech dominance: Apple, Microsoft, Google, Amazon, and Meta are U.S. companies. They captured the digital economy's profits. A German or Japanese investor missed these gains.

2. Dollar strength: The U.S. dollar strengthened from 1995 to 2000, then weakened significantly from 2000 to 2008, then strengthened again in 2014–2016. Currency movement added or subtracted 1–2% annually for international investors.

3. Valuation expansion: U.S. stocks expanded from 15x earnings (1995) to 22x earnings (2024). Valuation expansion added 1–2% per year of returns beyond earnings growth.

4. Demographic tailwinds: U.S. population grew faster than Japan or Europe. Younger population supports economic growth.

None of these trends is guaranteed to persist. U.S. valuations are now at 22x earnings, while international stocks trade at 14–16x. Future international returns could outperform U.S. returns if valuations mean-revert.

Moreover, you cannot know in advance which region will dominate the next 30 years. Japan dominated the 1980s. Then it did not from 1990 to 2020. Then it rebounded slightly from 2020 to 2024.

From an insurance perspective, an internationally diversified portfolio guarantees you will capture the best-performing region over the next 30 years. A U.S.-only portfolio guarantees you will miss the outperformance if another region leads.

Allocating DCA across regions

The simplest approach: DCA 100% into VTSAX (U.S. total market). This is appropriate if:

• You are young (under 35), can tolerate concentration risk, and are willing to take a chance on continued U.S. outperformance.
• You earn in U.S. dollars and spend in U.S. dollars; currency diversification offers no benefit.
• You want maximum simplicity (one fund, one contribution).

A more conservative approach: DCA into a 60/40 split:

• 60% VTI or VTSAX (U.S. total market)
• 40% VTIAX or VXUS (international total market)

This allocation is close to the global market-cap weight (40% international, 60% U.S.) and reduces the impact of any single region's underperformance. A $500/month contribution becomes $300 to VTI and $200 to VTIAX.

An aggressive alternative: DCA into a three-region split:

• 50% VTI (U.S.)
• 30% VXUS or EEM (developed international + emerging markets)
• 20% EEM or IEMG (pure emerging markets)

This overweights emerging markets relative to their global market weight, betting on faster long-term growth. A $500/month contribution becomes $250 to VTI, $150 to VXUS, and $100 to EEM.

The one-fund solution: global index funds

Vanguard and Fidelity offer global index funds that own all regions in market-cap-weighted proportions:

• VT (Vanguard Total World Stock ETF): ~40% U.S., 30% developed international, 30% emerging. Cost: 0.08%.
• VTWAX (Vanguard Total World Stock Index Fund Admiral Shares): Identical allocation, mutual fund format. Cost: 0.10%.

DCAing $500/month into VT or VTWAX automatically gives you global diversification. You do not decide on allocation; the fund rebalances itself. This is the simplest approach and avoids the "should I overweight emerging markets?" question.

For most investors, VT or VTWAX is optimal. You get global diversification with zero allocation decisions. Over 30 years, you will have $50,000 in the global economy's value, not $50,000 in the U.S. alone.

Currency considerations in international DCA

An international DCA investor faces currency volatility. If you DCA $500/month into VXUS (international stocks) denominated in euros, pounds, and yen, you are implicitly currency-cost-averaging.

Example: In January, you buy $500 of VXUS when EUR/USD is 1.20. You own $417 of euro-denominated stocks and $83 of dollar-denominated stocks. In February, EUR/USD moves to 1.10. You buy $500 of VXUS again. Now you own $454 of euro-denominated stocks and $46 of dollar-denominated stocks. Your average euro purchase price is lower than if you had timing-bought all euros at the January 1.20 rate.

Over decades, currency-cost-averaging is a form of automatic hedging. You buy more foreign currency when it is weak and less when it is strong. This is beneficial over the long term, assuming currencies mean-revert.

However, persistent currency movements (the dollar strengthening from 2014–2016) can negate international diversification benefits. From 2014 to 2016, international stocks returned 10% in local currency terms, but the strong dollar cut returns to 0% for U.S.-based investors. This demonstrates why currency diversification is valuable: your international holdings are a hedge against dollar weakness.

Real-world example: three-region DCA from 2015 to 2024

An investor aged 30 in 2015 DCAed $1,000/month into a three-region split for 10 years:

• $500/month to VTI (U.S.)
• $300/month to VXUS (developed + emerging international)
• $200/month to EEM (emerging-focused)

Total contributed: $120,000 ($10,000/month × 120 months).

U.S. allocation ($60,000): VTI grew at 12.5% annualized. Ending value: $170,000.

Developed international ($36,000): VXUS grew at 5.5% annualized. Ending value: $72,000.

Emerging markets ($24,000): EEM grew at 6.5% annualized. Ending value: $46,000.

Total ending value: $288,000 (2.4x contributed capital).

Had the investor DCAed 100% into VTI, ending value would be $280,000 (2.33x). The international allocation offered 2% protection against U.S. underperformance but did not boost returns in this decade of U.S. dominance.

This is the correct way to think about international diversification: it is insurance, not return enhancement. You accept 1–2% lower expected returns to protect against the risk of U.S. underperformance.

Developed markets vs. emerging markets

VXUS includes both developed (Canada, UK, Germany, Japan, Australia) and emerging (China, India, Brazil, Mexico) markets. It is approximately 70% developed, 30% emerging.

Some investors prefer a manual split:

• VXUS for one holding (simplicity)
• Or VTIAX (developed ex-U.S.) + VEMAX (emerging markets separately) for more control

There is no right answer. VXUS is simpler. Splitting developed and emerging allows you to overweight emerging if you believe emerging markets are undervalued.

Allocation decision tree

Next

International diversification is one form of geographic hedging. But investors operating across borders face a second, parallel form of averaging: currency-cost-averaging, where the fluctuation of exchange rates creates buying and selling opportunities distinct from stock price movements.