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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 40% 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.
- The US is only 60% of global stock market cap. Going 100% US means ignoring 40% of the world’s investable companies.
- Performance leadership rotates. International stocks beat US stocks from 2000 to 2009. US stocks dominated from 2010 to 2024. Nobody knows what comes next.
- One fund (VXUS, FTIHX, or FZILX) covers the entire international market. Add it alongside your US index fund and you are done.
- Target allocation: 20 to 40% of your stock allocation in international. The exact number matters less than having some.
- Hold international funds in taxable accounts if possible — the Foreign Tax Credit only applies outside of IRAs.
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 market dominates — and those stretches switch. The widget below shows this clearly:
US vs International: Decade-by-Decade
Total returns by period. Performance leadership has rotated — neither market always wins.
US = S&P 500 total return. International = MSCI EAFE (developed markets). Returns are approximate and exclude dividends in some periods. Sources: Dimensional Fund Advisors, MSCI, S&P Dow Jones Indices.
The data makes the case better than any argument: if you had been 100% US stocks in the 2000s, you lost money for a decade while international investors gained 30%. If you had been 100% international in the 2010s, you missed one of the greatest bull markets in US history. Owning both means you capture whichever 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 over long time horizons given US debt levels and monetary policy trends.
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 outperformance, but it does mean expected returns per dollar invested are currently higher internationally.
How to Invest in International Stocks
Total International 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+ | Developed + emerging |
| Fidelity Total International Index | FTIHX | 0.06% | 5,000+ | Developed + emerging |
| Fidelity ZERO International Index | FZILX | 0.00% | 2,500+ | Developed + emerging |
| Schwab International Equity ETF | SCHF | 0.06% | 1,500+ | Developed only |
| iShares Core MSCI Total Intl (IXUS) | IXUS | 0.07% | 4,400+ | Developed + emerging |
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. FZILX (Fidelity ZERO) is the cheapest option at literally 0%, but only works at Fidelity and cannot be transferred in-kind to other brokerages.
Splitting Developed and Emerging Markets
Some investors prefer separate funds for developed and emerging markets:
- Developed markets (Europe, Japan, Australia, Canada): Stable economies, established markets, lower volatility. Examples: VEA (Vanguard), IEFA (iShares).
- Emerging markets (China, India, Brazil, Taiwan, South Korea): Higher growth potential, higher volatility, more political risk. Examples: VWO (Vanguard), IEMG (iShares).
A total international fund like VXUS already includes both (roughly 75% developed, 25% emerging). Splitting them only makes sense if you want to specifically overweight or underweight emerging markets relative to their market cap weight.
How Much to Allocate
The global stock market is roughly 60% US, 40% international. Reasonable allocations range from 20% to 40% of your stock allocation:
- 20% international (US-heavy tilt): Meaningful diversification while maintaining a home-country bias. Common starting point.
- 30% international (moderate): Used by most 3-fund portfolio advocates and Vanguard target-date funds.
- 40% international (market-weight): Matches the global stock market’s actual composition. Maximum diversification. 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.
Use the visualizer below to see what your allocation looks like in dollar terms:
International Allocation Visualizer
See how your stock allocation splits between US and international.
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. Read the full setup guide in our 3-fund portfolio guide.
Tax Considerations
In Taxable Accounts
International stock funds pay dividends 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 of dollars per year on a large portfolio.
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, especially at smaller portfolio sizes.
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 that US multinationals cannot replicate.
"International stocks have underperformed for 15 years." Correct. And US stocks underperformed for the 10 years before that. The decade comparison above shows this clearly. Allocating based on recent performance is recency bias, and it leads to buying high and selling low.
"Emerging markets are too risky." A total international fund like VXUS is 75% developed markets. A 30% allocation to VXUS means roughly 7% of your total portfolio is in emerging markets -- manageable and broadly diversified across dozens of countries.
"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 -- the same philosophy as owning VTI for the US.
Frequently Asked Questions
What is the difference between VXUS and VEA?
VXUS is Total International (developed + emerging markets). VEA is Developed Markets Only (Europe, Japan, Australia, Canada) with no emerging market exposure. VXUS is the simpler, more comprehensive choice for most investors. If you want to avoid emerging market volatility entirely, VEA is the alternative -- but you miss the higher growth potential of markets like India and Taiwan.
Should I hedge currency risk?
For long-term investors (10+ years), currency hedging is generally unnecessary and adds cost. Over long periods, currency fluctuations tend to average out. Hedged international funds exist but carry higher expense ratios and add complexity without improving long-term returns for most investors. The currency exposure in unhedged funds is actually a feature for some investors -- a natural hedge against US dollar depreciation.
Can I invest in international stocks through my 401(k)?
Most 401(k) plans offer at least one international fund, often labeled "International Index," "Global ex-US," or "Foreign Stock." Look for the lowest expense ratio option available. If your plan has no international option, hold international stocks in your Roth IRA or taxable account instead to still get the global diversification.
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 in your 401(k), you already have meaningful international diversification built in -- you do not need to add VXUS separately for that account.
What countries are actually in VXUS?
VXUS holds stocks from over 40 countries. The largest allocations (approximate) are Japan (~15%), UK (~9%), Canada (~8%), France (~7%), Switzerland (~6%), Germany (~6%), Australia (~5%), and then smaller allocations across South Korea, Taiwan, India, China, Brazil, and many others. It is genuinely global, not just European.
Why did international stocks underperform so badly from 2010 to 2024?
Several factors combined: the dominance of US tech giants (Apple, Microsoft, Amazon, Google, Meta) which had no international equivalent in scale; a strengthening US dollar (which reduced international returns for US investors); slower economic growth in Europe and Japan; and tighter monetary policy that affected emerging markets. Whether these factors persist is unknown -- which is exactly why diversification across both markets makes sense rather than betting on US dominance continuing indefinitely.
Is FZILX (Fidelity ZERO) worth it given the 0% expense ratio?
FZILX is an excellent option if you invest exclusively at Fidelity and plan to stay there. The 0% expense ratio is genuinely free. The trade-off: FZILX is a proprietary Fidelity fund that cannot be transferred in-kind to another brokerage. If you ever move to Schwab or Vanguard, you would need to sell and rebuy, potentially triggering capital gains taxes in a taxable account. FTIHX at 0.06% (about $6 per year per $10,000) is portable. For most people in retirement accounts, FZILX is a fine choice.
How much of my bond allocation should be international?
Most individual investors stick to US bond funds (BND, FXNAX) for simplicity. International bonds add currency risk and are generally more complex than international stocks. Vanguard offers BNDX (Total International Bond ETF) for investors who want global bond exposure, but for beginners building a 3-fund portfolio, a single US bond fund is sufficient. International bond diversification is an advanced consideration, not a starting point.
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 portfolio at 20 to 40% of your stock allocation. The decade comparison above shows why counting on US dominance to continue indefinitely is a bet on recent history, not long-term evidence.
Diversify your portfolio globally today
Related reading:
- Want to build the complete 3-fund portfolio? Read our 3-fund portfolio guide to add VXUS alongside VTI and BND.
- Want to understand Fund 1 (US stocks)? Read our S&P 500 index funds guide.
- Want full automation including international exposure? Read our target-date fund guide -- one fund handles US, international, and bonds automatically.
