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Your portfolio is probably too US-focused. Here is why international stocks matter, how to invest in them through index funds, and how much of your portfolio to allocate.
If your investment portfolio is 100% US stocks, you are betting that one country (representing roughly 60% of the global stock market) will outperform the other 40% for the rest of your investing life. That bet has worked for the last 15 years. It did not work for the 15 years before that.
From 2000 to 2009, international stocks outperformed US stocks by roughly 30% cumulatively. From 2010 to 2024, US stocks outperformed international stocks by over 200%. Nobody predicted either outcome in advance, and nobody can predict the next 15 years.
International diversification is not about picking winners. It is about ensuring you own the winners wherever they happen to be. Here is how.
Why international stocks matter
The US is not the whole world
The US stock market is roughly 60% of global market capitalization, according to MSCI. That means 40% of the world’s investable companies are outside the US. Some of the largest and most profitable companies in the world are headquartered abroad: TSMC (Taiwan), Samsung (South Korea), Nestle (Switzerland), ASML (Netherlands), Toyota (Japan).
Owning only US stocks means you have zero direct exposure to these companies and the economies they operate in.
Performance leadership rotates
International stocks outperform US stocks roughly 40 to 50% of the time on a yearly basis, according to data from Dimensional Fund Advisors. Over longer periods, there are extended stretches where one dominates:
- 2000 to 2009: International developed markets returned roughly 30% total. US stocks (S&P 500) returned roughly -9% total. A lost decade for US investors.
- 2010 to 2024: S&P 500 returned roughly 450% total. International developed markets returned roughly 100%. US dominance.
The recency bias of the last 15 years makes it feel like US stocks always win. History says otherwise. Diversifying ensures you capture returns from whichever market leads next.
Currency diversification
International stocks are denominated in foreign currencies (euro, yen, pound, yuan). When the US dollar weakens, your international holdings gain value in dollar terms (in addition to any stock gains). This provides a natural hedge against dollar depreciation, which matters if you are concerned about long-term US monetary policy and debt levels.
Valuation gap
As of 2025, international stocks trade at significantly lower valuations than US stocks. The Shiller CAPE ratio for the US is roughly 33, while international developed markets trade at roughly 18 and emerging markets at roughly 12. Lower starting valuations historically correlate with higher future returns over 10+ year periods, according to research from Research Affiliates.
This does not guarantee international stocks will outperform, but it does mean the expected return per dollar invested is currently higher internationally than domestically.
How to invest in international stocks
Total international stock market index funds
The simplest approach: one fund that covers every publicly traded company outside the US.
| Fund | Ticker | Expense ratio | Holdings | Coverage |
|---|---|---|---|---|
| Vanguard Total International Stock ETF | VXUS | 0.07% | 8,500+ stocks | Developed + emerging markets |
| Fidelity Total International Index Fund | FTIHX | 0.06% | 5,000+ stocks | Developed + emerging markets |
| Fidelity ZERO International Index Fund | FZILX | 0.00% | 2,500+ stocks | Developed + emerging markets |
| Schwab International Equity ETF | SCHF | 0.06% | 1,500+ stocks | Developed markets only |
| iShares Core MSCI Total International Stock ETF | IXUS | 0.07% | 4,400+ stocks | Developed + emerging markets |
VXUS or FTIHX is the standard recommendation. One fund gives you exposure to thousands of companies across Europe, Japan, UK, Canada, Australia, South Korea, China, India, Brazil, and dozens of other countries.
Splitting developed and emerging markets
Some investors prefer separate funds for developed international markets and emerging markets:
Developed markets (Europe, Japan, Australia, Canada): Stable economies, established stock markets, lower volatility. Examples: Vanguard FTSE Developed Markets ETF (VEA), iShares Core MSCI EAFE (IEFA).
Emerging markets (China, India, Brazil, Taiwan, South Korea): Higher growth potential, higher volatility, more political and currency risk. Examples: Vanguard FTSE Emerging Markets ETF (VWO), iShares Core MSCI Emerging Markets (IEMG).
A total international fund like VXUS already includes both (roughly 75% developed, 25% emerging). Splitting them only makes sense if you want to overweight or underweight emerging markets relative to market cap.
How much to allocate
The global stock market is roughly 60% US, 40% international. A market-cap-weighted approach would put 40% of your stock allocation in international funds. But reasonable allocations range from 20% to 40% of stocks:
20% international (US-heavy tilt): Common starting point. Provides meaningful diversification while maintaining a home-country bias. Reduces portfolio volatility slightly.
30% international (moderate): The approach used by most 3-fund portfolio advocates and target-date funds from Vanguard.
40% international (market-weight): Matches the global stock market’s actual composition. Maximum diversification. Used by Vanguard’s target-date funds and recommended by many academic researchers.
The exact percentage matters less than having some. The difference between 25% and 35% international is small over 30 years. The difference between 0% and 25% is significant.
In practice: a 3-fund portfolio example
A 30-year-old with an aggressive allocation:
- 60% US Total Stock Market (VTI or FSKAX)
- 30% International Total Stock Market (VXUS or FTIHX)
- 10% US Total Bond Market (BND or FXNAX)
This gives 90% stocks (67% US, 33% international) and 10% bonds. Simple, diversified, and globally balanced.
Tax considerations
In taxable accounts
International stock funds pay dividends that are subject to foreign taxes withheld by the country of origin. You can claim a Foreign Tax Credit on your US tax return to offset this double taxation.
Hold international funds in taxable accounts (not IRAs) if possible. The Foreign Tax Credit is only available in taxable accounts. In an IRA, you pay foreign taxes but cannot claim the credit, effectively losing that money. This is part of the asset location strategy that can save hundreds per year.
In retirement accounts
If your 401(k) is the only account with an international fund option, hold international stocks there despite the lost Foreign Tax Credit. Having the diversification is more important than optimizing the tax credit.
Common objections answered
“US companies already have global exposure.” True, roughly 40% of S&P 500 revenue comes from abroad. But this is not the same as owning international stocks. US multinationals are still valued in US markets, subject to US regulations, and denominated in US dollars. International stocks provide direct exposure to foreign economies, currencies, and valuations.
“International stocks have underperformed for 15 years.” Correct. And US stocks underperformed for the previous 10 years. Performance leadership rotates. Allocating based on recent performance is recency bias, and it leads to buying high and selling low.
“Emerging markets are too risky.” Emerging markets have higher volatility, but a total international fund (VXUS) is 75% developed markets. The emerging market exposure is modest and diversified across dozens of countries. A 30% allocation to VXUS means roughly 7% of your total portfolio is in emerging markets, which is manageable.
“I do not understand foreign markets.” You do not need to. An international index fund owns thousands of companies across dozens of countries. You are not picking individual foreign stocks. You are owning the global market.
Frequently asked questions
What is the difference between VXUS and VEA? VXUS is Total International (developed + emerging markets). VEA is Developed Markets Only (no emerging). VXUS is the simpler, more diversified choice for most investors.
Should I hedge currency risk? For long-term investors (10+ years), currency hedging is unnecessary and adds cost. Over long periods, currency fluctuations tend to wash out. Hedged international funds exist but are more expensive and add complexity without improving long-term returns for most investors.
Can I invest in international stocks through my 401(k)? Most 401(k) plans offer at least one international fund (often “International Index” or “Global ex-US”). If yours does not, hold international stocks in your IRA or taxable account instead.
Do target-date funds include international stocks? Yes. Vanguard target-date funds allocate roughly 40% of stocks to international. Fidelity and Schwab target-date funds also include significant international exposure. If you use a target-date fund, you already have international diversification.
The bottom line
International stocks are not optional for a well-diversified portfolio. They provide exposure to 40% of the global stock market, protection against US-specific risks, currency diversification, and access to valuations that are currently more attractive than US markets.
Add one fund (VXUS, FTIHX, or FZILX) to your 3-fund portfolio at 20 to 40% of your stock allocation. It takes one trade and 2 minutes. The diversification benefit lasts a lifetime.
Diversify your portfolio globally