Allan Roth: Why International Stocks Are Suddenly Outperforming

The last decade has not been kind to international stocks. The total return of the Vanguard Total Stock Market ETF (VTI) is up 12.5% annually through 2024, while the Vanguard Total International Stock ETF (VXUS) gained only 5.1% annually. But this year through March 7, U.S. stocks are down 2.2%, while international stocks have gained 8.4% using the same two funds. That’s more than a 10 percentage-point differential.

International Stocks Gain

Europe and China turned in double-digit returns while Canada eked out a small gain. 

The Pacific Rim, dominated by Japan, South Korea and Australia, lagged the rest of the international market but still bested the U.S. by more than seven percentage points.

Though Americans are no longer permitted to invest in Russian stocks, a Russian stock index turned in an 11.9% return. 

Is this the beginning of a new trend or merely a short-term bump in the road? Only time will tell, of course, but Vanguard’s 10-year forecast is off to a good start. Vanguard predicted a median 3.8% annual return for U.S stocks and a 7.9% annual return for international stocks. The Vanguard Capital Markets Model Forecast (VCMM) was run on Nov. 8, 2024, shortly after the election, though I suspect that did not play a factor in the forecast.   

My Thoughts on Capitalism and Diversification

I believe in capitalism and diversification. Trade wars are bad for all parties involved, and free trade enhances all of our lives. 

While I doubt this would be legal, can you imagine if your state enacted tariffs for goods and services from other states? Of course, those other states would enact reciprocal tariffs as well. Though we need protective laws to ensure fairness, the more we restrict capitalism through tariffs or other measures, the worse our economic situation will become. One possible hypothesis of recent U.S. and international stock performance is that the U.S. will take on more damages from this war than the rest of the world. 

As mentioned, I also believe in diversification. I wouldn’t only buy stocks based in my home state of Colorado, and the same goes for the world. One key reason U.S. stocks have outperformed international stocks over the past decade is that tech, specifically artificial intelligence, has been hot. That won’t always be the case. And most of the world has far less debt and lower deficits than the U.S.

What I’m Telling Clients

Perhaps the most common phrase I tell clients is, “I don’t know anything the market doesn’t already know.” Maybe the second most common is, “If you can’t be right, at least be consistent.” 

I don’t know if international stocks will continue to outperform the U.S., but I do know with a high degree of confidence that fund flows will pour into international stock ETFs after they outperform for longer time periods.

Thus, I tell clients that whatever allocation they pick between U.S. and international stocks, they must stick to it. I suspect that investors buying international stock ETFs now will be fickle and sell when they underperform. Consistency beats performance-chasing in the long run.