Why International ETFs Underperform U.S. Markets—And Why That Might Not Matter

The narrative is familiar to many investors: international stocks have lagged the S&P 500 for the past 15 years, and international ETFs bear the brunt of this criticism. It’s easy to label any international ETF as a “bad” investment based purely on performance metrics. But this perspective misses a crucial point about how international ETFs actually work and what they’re designed to accomplish. The Vanguard Total International Stock ETF (NASDAQ: VXUS) is a textbook example—a fundamentally sound fund that suffers from widespread misunderstanding.

The mistake many investors make is evaluating international ETFs exclusively through the lens of relative performance against U.S. benchmarks. Yet comparing international funds to the S&P 500 requires understanding what each investment actually represents and why their performance trajectories diverge so dramatically.

How International ETFs and U.S. Markets Are Structurally Different

To understand why international ETFs have underperformed, start by examining the sector composition of each market. The S&P 500 is heavily concentrated in Technology, which currently comprises approximately 33% of the index. This is followed by Financials (13%), Consumer Discretionary (11%), and Communication Services (10%).

Now compare this to major international ETFs. The Vanguard Total International Stock ETF, which tracks the FTSE Global All Cap ex-US Index, maintains very different sector weights: Financials (23%), Industrials (15%), Technology (14%), and Consumer Discretionary (10%). The contrast is stark. International markets carry significantly less technology exposure—roughly half that of the United States—and are far more heavily weighted toward financial services and industrial production.

This structural difference is the root cause of diverging returns. International equity markets are inherently more cyclical, meaning they’re more sensitive to broad economic cycles. They depend less on innovation and software development and more on manufacturing, banking, and traditional industry. When an economy becomes disproportionately focused on technology—as the U.S. has over the past decade—markets with tech-heavy weightings naturally outperform those without it.

Why the U.S. Tech Boom Left International ETFs Behind

The past 15 years have been defined by technological disruption and, more recently, the artificial intelligence revolution. Companies driving this transformation—from semiconductor manufacturers to software giants—are predominantly U.S.-listed. Markets with concentrated exposure to these sectors have naturally delivered superior returns.

This doesn’t mean international ETFs are poorly constructed or mismanaged. It simply reflects a fundamental reality: when one sector or geographic region dominates returns, investments elsewhere will lag. Consider the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD), which focuses on dividend-paying companies with strong balance sheets. This fund underperformed significantly from 2023 to 2025, not because it’s a bad fund, but because its strategy—favoring dividend stability over growth—was out of favor during a tech rally. The strategy itself remains sound; it was simply the wrong bet during this particular market cycle.

International ETFs face an analogous situation. When markets shift away from technology and discover better relative value in cyclical sectors like manufacturing and banking, international diversification will likely prove its worth again.

Evaluating International ETFs on Their Actual Merits

The critical error in fund evaluation is confusing underperformance with poor fund quality. The Vanguard Total International Stock ETF delivers exactly what it promises: broad, low-cost exposure to international equity markets.

Consider the fund’s actual characteristics. It provides access to more than 8,500 individual stocks across dozens of countries and regions. Its $133 billion in assets under management ensures high liquidity and ease of trading. Most importantly, its expense ratio sits at just 0.05%—nearly negligible from a cost perspective.

These metrics define what a quality fund looks like. The fund isn’t trying to beat the S&P 500; it’s attempting to give investors affordable, simple access to an entire segment of global markets. When judged by these standards—breadth, liquidity, cost-efficiency—international ETFs like VXUS represent exceptional value.

Understanding Diversification in Global Markets

The investment case for international ETFs fundamentally rests on diversification principles. Markets that perform differently provide portfolio protection. A portfolio composed entirely of U.S. equities carries concentrated risk to American economic conditions and market cycles. Adding international exposure introduces assets that respond differently to economic shocks.

This is precisely why market structure matters. Because international and U.S. markets are compositionally different, they produce different returns during different periods. That divergence is a feature, not a bug. It means international ETFs serve a specific portfolio function: they don’t maximize returns during U.S. tech booms, but they provide ballast and opportunity during periods when U.S. valuations seem stretched or when international markets rotate into favor.

The Investment Decision: Should You Own International ETFs?

For investors building diversified portfolios, international ETFs deserve a place based on fundamentals, not short-term performance comparisons. The question isn’t whether an international ETF beats the S&P 500 in a given year or decade. The question is whether your portfolio benefits from exposure to different markets, different economic cycles, and different growth drivers.

The Vanguard Total International Stock ETF exemplifies this principle: it’s an exceptionally well-constructed fund offering everything investors should want—low costs, broad diversification, and meaningful exposure to global growth opportunities. That many investors dismiss such funds based purely on recent performance highlights how easily misunderstandings about investment strategy cloud judgment.

Ultimately, international ETFs aren’t for everyone. But for those seeking genuine portfolio diversification at minimal cost, they remain an effective and often overlooked tool in a comprehensive investment strategy.