Global ETFs: Why You Need International Exposure Now

Many investors feel comfortable putting every dollar into the S&P 500. It features familiar companies like Apple and Amazon, and its performance over the last decade has been stellar. However, relying solely on the U.S. market exposes your portfolio to concentration risk. Adding international Exchange Traded Funds (ETFs) is a practical way to capture growth from the other 40% of the world’s equity market while hedging against potential downturns in the American economy.

The Problem With "Home Bias"

“Home bias” is a financial phenomenon where investors over-allocate to domestic stocks because they feel safer or more familiar. For U.S. investors, this currently means buying the S&P 500 exclusively. While this strategy has worked well recently, history suggests market leadership rotates.

In the 2000s (often called the “Lost Decade” for U.S. stocks), the S&P 500 generated negative returns. During that same period, emerging markets and developed international markets significantly outperformed the U.S. By ignoring international stocks, you are betting that the U.S. will be the top-performing market forever. That is a statistical improbability.

The Valuation Gap

One of the strongest arguments for international exposure right now is valuation. As of early 2024, the S&P 500 trades at a price-to-earnings (P/E) ratio of roughly 24x. In contrast, developed international markets trade closer to 14x, and emerging markets are often even cheaper.

When you buy international ETFs today, you are essentially buying corporate earnings at a distinct discount compared to what you pay for American earnings. This creates a margin of safety if high-flying U.S. tech stocks face a correction.

Types of International Exposure

To diversify correctly, you need to understand the two main categories of international markets. Most broad international ETFs combine these, but you can also target them individually.

Developed Markets

These are mature, advanced economies with established rule of law and stable financial systems. The primary regions included here are Western Europe, Japan, Australia, and Canada.

• Characteristics: Slower growth than the U.S., but often higher dividend yields and lower valuations.
• Key Companies: Investing here gives you ownership in massive global players like Nestle (Switzerland), Toyota (Japan), ASML (Netherlands), and Novo Nordisk (Denmark).
• Top ETF Option: The Vanguard FTSE Developed Markets ETF (VEA) focuses strictly on these stable regions.

Emerging Markets

These are nations with growing economies that are transitioning toward developed status. This category includes China, India, Brazil, Taiwan, and Mexico.

• Characteristics: Higher volatility and political risk, but higher potential for rapid economic expansion and demographic growth.
• Key Companies: This provides exposure to semiconductor giants like TSMC (Taiwan) or tech conglomerates like Tencent (China).
• Top ETF Option: The Vanguard FTSE Emerging Markets ETF (VWO) or iShares Core MSCI Emerging Markets ETF (IEMG).

Top "Total International" ETFs to Buy

If you do not want to manage separate funds for Europe, Asia, and emerging markets, you can utilize a “Total International” fund. These funds capture the entire world stock market excluding the United States.

Vanguard Total International Stock ETF (VXUS) This is the gold standard for passive international investing. It holds over 8,000 stocks across both developed and emerging markets. With an expense ratio of just 0.07%, it is an extremely cheap way to own the rest of the world. If you own a Total US Stock Market fund and VXUS, you effectively own every public company on the planet.

iShares Core MSCI Total International Stock ETF (IXUS) This is BlackRock’s competitor to VXUS. It tracks a slightly different index but offers very similar exposure and pricing. It is an excellent alternative if your brokerage offers commission-free trading specifically on iShares products.

The Currency Hedge Factor

Investing internationally also acts as a currency play. When you buy a share of a European company, your investment is effectively denominated in Euros.

• Strong Dollar: If the U.S. Dollar is strong (as it has been recently), international returns look lower when converted back to USD.
• Weak Dollar: If the U.S. Dollar weakens, your foreign holdings become more valuable instantly.

Since currency markets are cyclical, holding foreign assets protects your purchasing power if the value of the Dollar declines relative to other major currencies.

Does the S&P 500 Provide Enough Global Exposure?

A common counterargument is that S&P 500 companies generate roughly 40% of their revenue from overseas. Therefore, investors claim they do not need a separate international fund.

This logic is flawed for two reasons:

1. Sector Skew: The U.S. market is heavily weighted toward Technology. International markets provide better exposure to Industrials, Materials, and Financials.
2. Currency Correlation: Even if Apple sells iPhones in France, its stock is priced in Dollars and moves with the U.S. market. It does not provide the diversification benefit of owning a company priced in Euros or Yen.

Frequently Asked Questions

What percentage of my portfolio should be international? Most asset managers, including Vanguard and Fidelity, recommend allocating between 20% and 40% of your equity portfolio to international stocks. A simple ⁸⁰⁄₂₀ or ⁷⁰⁄₃₀ split between U.S. and International is a popular starting point.

Are international dividends qualified? Generally, yes. If the country has a tax treaty with the United States (which includes most developed nations), the dividends are taxed at the lower qualified dividend rate. However, you may see a “Foreign Tax Credit” on your 1099 form, which usually allows you to claim a credit for taxes paid to foreign governments.

Why has international performed so poorly compared to the US? The last 10 to 12 years have been dominated by U.S. big tech. Additionally, the U.S. Dollar has been historically strong, which acts as a headwind for foreign returns. However, market cycles are rarely permanent. International stocks outperformed the U.S. in the 1970s, mid-80s, and 2000s.

Should I hedge my currency exposure? Most retail investors should not currency hedge. Hedging is expensive and removes the diversification benefit of holding foreign currency. Over long periods (10+ years), currency fluctuations tend to even out.