Do you recall how the U.S. market performed between 1999 and 2009? If not, it’s a classic case of recency bias clouding your investment perspectives.
During that decade, the U.S. market experienced a flat trajectory, with a total return of just 1.7%. This sluggish growth was largely due to the impact of the dot-com bubble and the 2008 financial crisis.
In contrast, international developed markets, which include countries like Japan, Germany and the U.K., fared much better, yielding a return of 4.1%.
The story was even more impressive for international emerging markets, encompassing nations like China, Brazil and India, which delivered a remarkable 13.7% return in the same period.
This historical snapshot serves as a reminder that market leadership rotates. The strong performance of the U.S. market in recent years might have biased investors and created inflated expectations for future returns that may not pan out.
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“The ex-U.S. market makes up about 40% to 45% of the world’s market capitalization, so by ignoring international stocks, investors are missing out on roughly half the world’s investing opportunities,” says Kirk Kinder, founder and president of Picket Fence Financial. “Moreover, international stocks are substantially undervalued when you look at metrics like price-to-earnings and price-to-book ratios.”
However, the principle of mean reversion suggests that the U.S. market isn’t destined to outperform indefinitely. So, relying solely on it could be a risky bet.
“Adding international stocks to your portfolio can dampen volatility and improve returns, since the U.S. economy and market may face challenges at different times compared to international regions,” says Scott Klimo, chief investment officer at Saturna Capital. “Mitigating currency risk also plays a role as the U.S. dollar may strengthen or weaken versus other countries at different times.”
For investors looking to diversify internationally without dealing with the complexities of currency conversion or navigating American depositary receipts, mutual funds and exchange-traded funds, or ETFs, these funds offer a practical and accessible solution.
These vehicles allow for straightforward investment in a broad array of international stocks, thereby providing the tangible benefits of global diversification at a low fee.
Here are seven of the best international stock funds to buy today:
| Fund | Top Holdings | Top Exposure | Expense Ratio |
| Vanguard Total International Stock Index Fund Admiral Shares (ticker: VTIAX) | Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), Novo Nordisk (NOVO-B.CO) | Europe, Pacific, emerging markets | 0.11% |
| Fidelity International Index Fund (FSPSX) | Novo Nordisk, Nestle SA (NESN.SW) | Europe, Pacific | 0.035% |
| Fidelity Emerging Markets Index Fund (FPADX) | Taiwan Semiconductor, Tencent Holdings Ltd. (0700.HK) | Emerging Asia | 0.075% |
| Avantis Emerging Markets Equity ETF (AVEM) | Taiwan Semiconductor, Samsung Electronics Co. Ltd. (SMSN.IL) | Asia Pacific | 0.33% |
| Avantis International Small Cap Value ETF (AVDV) | Marks and Spencer Group PLC (MKS.L), Swissquote Group Holding Ltd. (SQN.SW) | Europe, Asia Pacific | 0.36% |
| Dimensional International Small Cap Value ETF (DISV) | Banco BPM SPA (BAMI.IM), Banco De Sabadell SA (SAB.SM) | Japan, U.K., Canada | 0.42% |
| KraneShares CSI China Internet ETF (KWEB) | PDD Holdings Inc. (PDD), Tencent Holdings Ltd. | China | 0.69% |
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
“Vanguard’s recently released 2023 Economic and Market Outlook expects international equities to outperform U.S. stocks over the next decade, largely driven by lower valuations, higher dividend yields and a favorable currency outlook,” says Christine Franquin, principal and senior portfolio manager at Vanguard. VTIAX offers exposure to both emerging and developed markets for a 0.11% expense ratio.
This mutual fund tracks the FTSE Global All Cap ex U.S. Index, which currently holds some 8,500 market-cap-weighted international stocks. By pairing VTIAX with a U.S. market equity fund in various proportions, investors can easily dial in their desired amount of international stock exposure. The fund also comes in ETF form as the Vanguard Total International Stock ETF (VXUS).
Fidelity International Index Fund (FSPSX)
Investors wishing to slice and dice the ratio of developed versus emerging market stocks in their international equity allocation further can use funds like FSPSX to do so. This fund tracks the Morgan Stanley Capital International Europe, Australasia and Far East Index for a very low 0.035% expense ratio. With a track record dating back to 1997, FSPSX is one of the oldest international stock funds out there.
In terms of composition, companies from Japan, the U.K. and France dominate this fund’s holdings at around 22%, 15% and 12%, respectively. As with most Fidelity mutual funds, FSPSX does not require a minimum initial investment, nor does it charge a transaction fee. With just over $39 billion in assets under management, or AUM, this fund is well capitalized and highly popular.
Fidelity Emerging Markets Index Fund (FPADX)
Investors willing to assume higher risk in the pursuit of possible outperformance can choose to overweight emerging markets via a fund like FPADX. This fund tracks the MSCI Emerging Markets Index, which is currently heavily weighted to countries like China, India and Taiwan at 29%, 15% and 15%, respectively. It is slightly more expensive than FSPSX at a 0.075% expense ratio.
Investors who overweight FPADX must be comfortable with higher volatility and possible periods of under-performance. Over the past decade, FPADX has only returned a total of 1.3% annualized as of Oct. 31. Long periods of flat performance like this can be difficult for investors to stick with, so prospective investors should have a clear thesis in mind for overweighting emerging markets.
Avantis Emerging Markets Equity ETF (AVEM)
“Market-cap-weighted index funds weigh their holdings only based on the size of the company,” says Mitchell Firestein, senior portfolio manager at Avantis Investors. “The problem with this is that companies with larger market capitalizations get more weight without considering their expected returns.” As an alternative, investors can buy AVEM, which is actively managed using a rules-based strategy.
“AVEM resolves this by considering both a company’s market capitalization and its expected return,” Firestein says. “It does so by overweighting, relative to their market cap weights, large- and small-cap companies with attractive valuations which are expected to deliver better return outcomes.” This ETF charges a 0.33% expense ratio and also screens its holdings for higher profitability.
Avantis International Small Cap Value ETF (AVDV)
“Empirical research shows that small-cap companies with high profitability and trading at low prices relative to their equity are expected to deliver very high performance,” says Matthew Dubin, portfolio manager at Avantis Investors. This “factor investing” strategy is seen in AVDV, which uses rules-based active management to select small-cap value stocks from international developed markets.
“International small caps provide a broad universe of companies across more than 20 countries with extremely attractive valuations,” Dubin says. “AVDV focuses on these attractive small-cap companies in a very well-diversified portfolio to minimize company-specific risk while also enhancing expected performance.” The ETF charges a 0.36% expense ratio and also screens for profitability in holdings.
Dimensional International Small Cap Value ETF (DISV)
“Looking at average annualized returns going back decades, small-cap stocks have beaten large-caps, value has outperformed growth and high-profitability stocks have out-gained low profitability stocks,” says Mary Phillips, deputy head of portfolio management at Dimensional Fund Advisors.” For an alternative to AVDV, Dimensional offers DISV, which also actively selects small-cap value stocks.
The disciplined, rules-based methodology used by DISV ensures fund turnover remains at a low 3% despite its use of active management, which means better cost savings and tax efficiency for investors. Investors get good diversification with over 1,500 holdings, averaging $2.5 billion in market cap at a 0.77 aggregate price-to-book ratio, which points to the ETF’s small-cap value tilt. DISV charges a 0.42% expense ratio.
KraneShares CSI China Internet ETF (KWEB)
International investing doesn’t just mean holding broad-market funds. Investors can also zoom in on specific sectors and industries across the world. A great example is KWEB, which targets Chinese internet technology companies. This ETF holds companies like Tencent Holdings Ltd., Alibaba Group Holdings Ltd. (9988.HK) and Baidu Inc. (9888.HK) for a 0.69% expense ratio. “The valuation disparity between U.S. and Chinese internet companies has reached ‘extreme’ levels,” says Brendan Ahern, chief investment officer at KraneShares. “One could purchase all 31 companies in KWEB with the market cap of either Amazon.com Inc. (AMZN) or Alphabet Inc. (GOOG, GOOGL) and still have $140 billion-plus left over.”
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7 Best International Stock Funds to Buy originally appeared on usnews.com
Update 11/16/23: This story was previously published at an earlier date and has been updated with new information.
