For as long as most of us can remember, the conversation around international diversification went roughly the same way. Advisors would recommend it while investors nodded approval, and then everyone kept their money in the S&P 500 anyway.
In 2025, this calculation finally broke down in a visible and measurable way as international stocks returned roughly 32% while the S&P returned roughly 18%, a gap of about percentage points that was hard to explain away as noise. This kind of outperformance doesn’t happen by accident, and understanding why it happened is the most useful thing an investor can do with it.
Why International Won In 2025
Ultimately, if you look at why international won in 2025, three forces converged to drive the outperformance. The first is that the US dollar weakened over the course of the year, which automatically boosts return on foreign assets when converted back to dollars.
Secondly, European governments launched meaningful fiscal stimulus programs that lifted earnings expectations across the continent. Lastly, US technology valuations, after years of compressing returns on everything except a handful of mega-cap names, reached levels that made the comparative cheapness of international markets impossible to ignore.
The valuation gap tells the story more cleanly than almost anything else, as the S&P 500 currently trades at roughly 29 times earnings. The Vanguard Total International Stock ETF (NASDAQ:VXUS) carries a P/E of 16.21, a discount of nearly half. When valuations diverge that far, reversion tends to be a matter of when, not if.
Vanguard Total International Stock ETF: The Broadest, Cheapest Way In
With 8,703 holdings across both developed and emerging markets, the Vanguard Total International Stock ETF is about as diversified as a single fund can get. The expense ratio of 0.05% is among the lowest available for any broad-market ETF, all while net assets are approximately $636 billion, making it one of the largest international funds in existence.
The top holdings reflect names like Taiwan Semiconductor Manufacturing (NYSE:TSM) and ASML (NASDAQ:ASML | ASML Price Prediction), while Financial services lead the sector mix at 22.28%, followed by Industrials at 16.31%, and Technology at 16.16%. The fund closed at $77.31 on March 24, up 2.48% year-to-date as international markets pulled back from their early-March peaks, while still holding a meaningful lead over the S&P 500 on a rolling 12-month basis.
What makes the forward case particularly interesting is that the projects are coming from Vanguard itself, as their published 2026 market outlook projects roughly 5% to 7% average annual returns for ex-U.S. equities over the next decade, versus 4% to 5% for US equities. This is not a fringe view, as international ETF inflows exceeded $220 billion in 2025 and hit roughly $250 billion in the first six weeks of 2026, so the money is moving before most retail investors have even noticed.
Vanguard International High Dividend Yield ETF: The Income and Value Tilt
For investors who want international exposure with a higher income component and an even cheaper valuation, the Vanguard High Dividend Yield ETF (NASDAQ:VYMI) adds a different angle to the same thesis. The fund holds 1,532 stocks screened for dividend yield, which naturally tilts the portfolio toward Financials at 40.48%, Industrials at 9%, and Energy at 8.36%, well above Technology, which represents just 3.40%.
The result is a P/E/ of 13.39, cheaper than the Vanguard Total International Stock ETF and significantly cheaper than the US market. The expense ratio is 0.07%, yield at 3.28%, all while the fund has gained roughly 28% over the past year, outperforming both the Vanguard Total International Stock ETF and the S&P 500 over that period. The 52-week range of $65.08 to $101.71 reflects a fund that participated fully in last year’s international rally.
The stock closed at $93.54 on March 24, with a YTD total return of 3.93%.
The Practical Takeaway
The Vanguard Total International Stock ETF is the core holding, offering maximum diversification, minimal cost, and broad participation in international growth. The Vanguard High Dividend Yield ETF is the income-and-value complement, with a higher yield, a deeper valuation discount, and a sector profile that responds differently to rate environments than tech-heavy funds do.
Fifteen percentage points of outperformance in a single year is the kind of data point that gets remembered, but the valuation gap, the capital flows, and Vanguard’s own projections all point in the same direction in 2026, and at 5 and 7 basis points respectively, the cost of being wrong is about as low as it gets.
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