Thank Asia for International Stocks' Outperformance This Year

If you're an investor in international stocks, you can thank Asia for powering your outperformance this year.

The Vanguard Total International Stock ETF (VXUS) is outpacing the Vanguard Total Stock Market ETF (VTI) for a second straight year, gaining 12% versus 10%. That follows an even bigger gap last year, when VXUS trounced its domestic counterpart 32.4% to 17.1%.

Last year's rally was fairly broad based. This year's gains are far more concentrated. More than 8 percentage points of VXUS's return, roughly two thirds of the total, traces back to the Asia Pacific region. Taiwan alone accounts for 3.3 percentage points, South Korea 2.7, and Japan 2.2.

The common thread is artificial intelligence. All three markets sit at the heart of the semiconductor supply chain powering the AI boom. Taiwan is home to TSMC, the contract manufacturer building the most advanced AI chips. South Korea's Samsung and SK Hynix dominate the high-bandwidth memory those chips depend on. And Japan supplies a big chunk of the equipment and materials that make chip production possible.

No other single country added more than 1 percentage point to VXUS's return. The only other region to clear that bar was Western Europe, which collectively contributed 3.3 percentage points.

All three of the aforementioned Asian markets are punching above their weight. Japan is responsible for over 20% of VXUS's return despite averaging just a 15% weight in the fund. South Korea has done the same while accounting for less than 6% of the ETF. And Taiwan is behind more than a quarter of the return despite averaging only 7.5% of the portfolio.

The US still leads the AI industry. But Asia is playing a big part too, and it's helping push international ETFs to another year of outperformance.