Introduction: The financial landscape is constantly evolving, and with it, investors are increasingly seeking opportunities beyond the traditional US stock market. One notable trend in recent years is the outperformance of international exchange-traded funds (ETFs) compared to US stocks. This article explores the reasons behind this trend and highlights the benefits of diversifying investments in international ETFs.

Understanding International ETFs

International ETFs are investment funds that track the performance of a basket of stocks from various countries around the world. They offer investors the opportunity to gain exposure to different markets without having to directly invest in foreign stocks. This diversification can be particularly beneficial during times of volatility or economic uncertainty in a single market.

Reasons for Outperformance

Several factors contribute to the outperformance of international ETFs:

1. Diversification: By investing in international ETFs, investors can benefit from the strengths of different economies. For example, if the US market underperforms, investments in other markets with stronger growth potential can offset the losses.

2. Emerging Markets: Many international ETFs include emerging markets such as China, India, and Brazil. These markets have experienced rapid growth in recent years, offering significant potential for investors.

3. Currency Fluctuations: Investing in international ETFs can provide exposure to currency fluctuations, which can be advantageous depending on the investor's perspective. For example, if the US dollar strengthens, investors in international ETFs may experience higher returns when converted back to USD.

4. Lower Fees: Many international ETFs offer lower fees compared to actively managed funds, making them an attractive option for investors seeking cost-effective diversification.

Case Study: Vanguard FTSE Emerging Markets ETF

A prime example of an international ETF that has outperformed US stocks is the Vanguard FTSE Emerging Markets ETF (VWO). This ETF tracks the performance of emerging market equities and has consistently delivered strong returns over the years.

Between 2009 and 2021, VWO returned an average of 9.8% per year, while the S&P 500 Index returned an average of 7.6% during the same period. This demonstrates the potential for higher returns in international ETFs compared to US stocks.

Benefits of Investing in International ETFs

Investing in international ETFs offers several key benefits:

1. Growth Potential: Emerging markets often experience rapid economic growth, providing opportunities for significant returns.

2. Diversification: Exposure to multiple markets can help mitigate the risk of a market downturn in any single region.

3. Currency Exposure: International ETFs provide exposure to currency movements, which can add another layer of potential returns.

4. Lower Fees: Many international ETFs have lower fees compared to traditional actively managed funds, making them a cost-effective investment option.

Conclusion:

In summary, international ETFs have outperformed US stocks in recent years, driven by factors such as diversification, emerging market growth, and currency exposure. Investing in international ETFs can be an attractive option for investors seeking to diversify their portfolios and potentially achieve higher returns.