The Case For (and Against) Leaving America
If you only own US stocks, you’ve been richly rewarded over the past 15 years. The S&P 500 has annualized roughly 14% since 2010, leaving international markets in the dust. It’s tempting to conclude that international stocks are a drag on performance and you should skip them entirely.
Many investors have reached exactly that conclusion. And they might keep being right — for a while. But financial history suggests that permanently ignoring 40% of the world’s stock market based on one 15-year period is a bet that eventually goes wrong.
Let me walk you through what international ETFs actually hold, why they’ve underperformed, whether that might change, and how much (if any) international exposure belongs in your portfolio.
What “International” Actually Means
International stocks are divided into two broad categories:
Developed International Markets
These are wealthy, stable economies with mature stock markets:
| Region | Key Countries | Market Character |
|---|---|---|
| Europe | UK, Germany, France, Switzerland, Netherlands | Mature companies, higher dividends, slower growth |
| Pacific | Japan, Australia, South Korea | Japan dominates; mix of industry and technology |
| Other | Canada, Israel, Singapore | Smaller markets with specific sector strengths |
Main ETFs: VXUS (includes both developed and emerging), EFA (developed only)
Developed international stocks tend to be more similar to US stocks — established companies with strong regulations, reliable accounting, and active stock exchanges. They’re “international” in geography but not dramatically different in character from what you’d find in the S&P 500.
Emerging Markets
These are developing economies with faster growth but more volatility and political risk:
| Region | Key Countries | Market Character |
|---|---|---|
| Asia | China, India, Taiwan, South Korea | Manufacturing, technology, rapidly growing middle class |
| Latin America | Brazil, Mexico | Natural resources, consumer growth |
| Other | South Africa, Saudi Arabia, Indonesia | Commodity-driven, demographic growth |
Main ETFs: VWO (emerging markets), IEMG (iShares emerging markets)
Emerging market stocks are fundamentally different from developed market stocks. They offer higher growth potential but come with risks that US investors rarely face: currency crises, political instability, capital controls, corporate governance issues, and regulatory uncertainty.
Taiwan Semiconductor (TSMC) — the most important chipmaker on Earth — is an emerging market stock. That should tell you something about how misleading the “emerging” label can be. These markets contain some of the most important companies in the global economy.
The International ETF Lineup
| ETF | Coverage | Holdings | Expense Ratio | Yield |
|---|---|---|---|---|
| VXUS | All international (developed + emerging) | ~8,500 | 0.07% | ~3.0% |
| IXUS | All international (iShares version) | ~4,400 | 0.07% | ~2.8% |
| EFA | Developed international only | ~780 | 0.32% | ~2.8% |
| VEA | Developed international only | ~4,400 | 0.05% | ~2.9% |
| VWO | Emerging markets only | ~5,800 | 0.08% | ~3.2% |
| IEMG | Emerging markets only | ~2,800 | 0.09% | ~2.8% |
| INDA | India only | ~150 | 0.65% | ~0.8% |
| EWJ | Japan only | ~230 | 0.50% | ~1.6% |
For most investors, VXUS is the one to know. It covers everything outside the US — developed and emerging — in a single fund at a rock-bottom 0.07% expense ratio. It’s the international counterpart to VTI, and together they form the stock market portion of the classic three-fund portfolio.
Why International Has Underperformed
The numbers are stark. Over the past 15 years, the S&P 500 has roughly doubled the returns of international stocks:
| Period | S&P 500 (VOO) | International (VXUS) | Gap |
|---|---|---|---|
| 10 Years (ann.) | ~13% | ~5% | US +8% |
| 15 Years (ann.) | ~14% | ~5% | US +9% |
An 8-9% annual gap is enormous. On a $100,000 investment over 15 years, the S&P 500 turned into roughly $660,000 while international turned into roughly $208,000. That’s not a rounding error — it’s a fundamentally different outcome.
What caused this gap?
The US Tech Boom
The biggest single factor. The US is home to Apple, Microsoft, NVIDIA, Amazon, Alphabet, Meta, and the rest of the tech sector responsible for most of the S&P 500’s gains. No other country has a comparable technology sector. International indexes are heavier in banks, industrial companies, and consumer goods — sectors that grew much more slowly.
Dollar Strength
International stock returns for US investors include a currency component. When the dollar strengthens against foreign currencies (as it did for much of the 2010s), it reduces the dollar-denominated returns of international stocks. A European stock might have returned 8% in euros, but after converting back to a stronger dollar, the US investor sees only 5%.
Japan’s Stagnation
Japan is the largest single country in the international index at about 15-17% of VXUS. Japan’s stock market was in a 30+ year bear market following its 1989 bubble peak. While Japan has finally recovered in recent years, its decades of underperformance dragged international averages down significantly.
European Growth Challenges
Europe faced multiple crises — the Euro debt crisis (2011-2012), Brexit (2016), sluggish economic growth, and demographic headwinds. European companies, while often excellent businesses, grew their earnings much slower than American companies.
China Regulatory Risk
Chinese stocks were a large portion of emerging markets and experienced severe government crackdowns in 2021-2023 (tech sector regulations, property sector collapse, political tensions). This hurt emerging market returns substantially.
Why International Might Come Back
Every factor listed above is backward-looking. Here’s the forward-looking case for international stocks:
Valuation Gap
This is the strongest argument. International stocks are significantly cheaper than US stocks by almost every metric:
| Metric | S&P 500 | International Developed | Emerging Markets |
|---|---|---|---|
| Price/Earnings | ~22x | ~14x | ~13x |
| Price/Book | ~4.5x | ~1.8x | ~1.7x |
| Dividend Yield | ~1.3% | ~2.9% | ~3.2% |
International stocks are trading at a 35-40% discount to US stocks on earnings. Historically, buying cheaper markets and selling expensive ones has been a reliable (though slow-moving) long-term strategy. The valuation gap has to close eventually — either through international stocks rising, US stocks falling, or some combination.
Emerging Market Growth
India’s economy is growing at 6-7% annually with a young, massive population. Southeast Asian countries (Vietnam, Indonesia, Philippines) are industrializing and growing rapidly. Africa has the world’s fastest-growing population and is in the early stages of economic development.
These regions may produce the next generation of globally important companies. Being invested international helps you capture that growth.
Mean Reversion
As we discussed in our US market dominance article, market leadership rotates on a generational timescale. The US dominated the 1990s, underperformed in the 2000s, dominated the 2010s-2020s. If history rhymes, international markets may have their decade in the sun.
The Dollar Could Weaken
If the US dollar weakens (due to fiscal deficits, changing global trade patterns, or other factors), international stocks would get a tailwind in dollar terms — the reverse of what happened in the 2010s.
Japan’s Awakening
Japan’s stock market hit new all-time highs in 2024, finally surpassing its 1989 peak. Corporate governance reforms, increased shareholder returns, and a weaker yen making exports more competitive have revitalized Japanese stocks. This could be the beginning of a sustained recovery for the second-largest developed market.
How Much International Should You Own?
This is genuinely debatable. Here are the main schools of thought:
| Philosophy | International Allocation | Reasoning |
|---|---|---|
| Global market cap | 40% | Own the world as it is |
| Moderate tilt | 25-35% | Some home bias, but meaningful diversification |
| Light exposure | 15-20% | Acknowledge US exceptionalism, hedge modestly |
| US only | 0% | US companies already have global revenue |
My view: Something in the 20-35% range is appropriate for most US investors. Enough to provide genuine geographic diversification, not so much that you’re piling into an asset class that’s been underperforming.
If you go with 0% international, you’re making a concentrated bet that US dominance continues indefinitely. That bet has been right for 15 years. It was wrong for the 10 years before that. You won’t know when the cycle turns until after it’s already turned.
Building International Exposure
The Simple Approach (One Fund)
Just buy VXUS and pair it with VTI:
| Allocation | ETFs | Cost |
|---|---|---|
| 70% US / 30% International | VTI + VXUS | ~0.04% blended |
| 60% US / 40% International | VTI + VXUS | ~0.05% blended |
Done. Two funds, entire world, under 0.05%.
The Customized Approach (Two International Funds)
If you want to control your developed vs. emerging market exposure separately:
| Allocation | ETFs | Why |
|---|---|---|
| 60% VTI + 25% VEA + 15% VWO | Three funds | More control over regional weights |
| 70% VTI + 20% VEA + 10% VWO | Three funds | Lighter emerging markets |
This lets you, for example, overweight emerging markets if you believe in Asia’s growth story, or underweight them if you’re concerned about China risk.
The Single-Country Approach (Satellite)
For investors who want to make specific country bets as a satellite:
| Country | ETF | Expense Ratio | The Thesis |
|---|---|---|---|
| India | INDA | 0.65% | Young population, rapid GDP growth, digital transformation |
| Japan | EWJ | 0.50% | Corporate governance reform, undervaluation, earnings recovery |
| South Korea | EWY | 0.57% | Semiconductor exposure (Samsung, SK Hynix), cheap valuations |
Single-country ETFs should be small satellite positions (5% or less). Country-specific risk is real — political changes, currency crises, or sector crashes can hit individual countries much harder than diversified international funds.
The Dividend Bonus
One underappreciated aspect of international stocks: they pay higher dividends.
VXUS yields about 3.0%, compared to VTI’s 1.3%. International companies — especially in Europe and emerging markets — tend to distribute a larger share of their profits as dividends.
If you’re building a dividend income stream, adding VXUS to your portfolio immediately boosts your portfolio-level yield without adding a dedicated dividend ETF. A 70% VTI / 30% VXUS blend yields roughly 1.8% — 40% more income than VTI alone.
Final Thoughts
International investing isn’t exciting right now. The US has been winning, and momentum feels like it’ll continue forever. But “everyone agrees the US will keep winning” is exactly the kind of consensus that precedes a rotation.
You don’t need to make a big bet on international stocks. But having 20-30% of your stock allocation outside the US provides genuine diversification — the kind that matters when (not if) the US market hits a rough patch that international markets don’t share.
Own the US. Own the world. Sleep well knowing you’re diversified regardless of what the next decade brings.
Explore how adding international ETFs changes your portfolio’s risk and return profile. Try our free ETF Portfolio Analyzer to simulate different global allocations.