International ETFs: Investing Beyond the US Market

The US stock market represents roughly 60% of global equity value, but that leaves 40% of the world's investment opportunities untouched. International ETFs are funds that track stocks from countries outside the United States—giving you instant exposure to economies in Europe, Asia, Latin America, and beyond without needing to open foreign brokerage accounts or convert currencies yourself.

For most investors, a portfolio consisting entirely of US stocks misses meaningful growth potential. When Apple (AAPL) struggled in 2022, dropping 27% for the year, many international markets showed different patterns. Germany's DAX fell 28%, but Japan's Nikkei declined only 9%, and India's Sensex gained 3%. This variation is why geographic diversification matters.

In this guide, you'll learn what international ETFs are, how they work, the different categories available, and how to evaluate them for your portfolio.

What Are International ETFs?

An international ETF is an exchange-traded fund that holds stocks from companies outside your home country. For US-based investors, this means holdings in Europe, Asia-Pacific, emerging markets, or specific countries like Japan or Canada. These funds trade on US exchanges (like the NYSE or NASDAQ) just like domestic ETFs, but they own foreign securities.

Unlike mutual funds that require a sales process and charge higher fees, ETFs trade throughout the day like stocks. You can buy 100 shares of an international ETF at 10:45 AM on a Tuesday if you want—not just at the market close.

How They Work: The Mechanics

When you buy shares of VXUS (Vanguard Total International Stock ETF), you don't directly own foreign stocks. Instead, you own a tiny fraction of a fund that holds thousands of international company stocks. The fund manager buys and maintains these positions, and you earn dividends (if any) proportional to your ownership.

The ETF structure creates arbitrage opportunities. If the ETF price drifts above the value of its holdings, authorized participants can buy the underlying stocks and exchange them for new ETF shares, pushing the price back down. This mechanism keeps international ETF prices closely aligned with their net asset value (NAV).

Why Add International ETFs to Your Portfolio?

Geographic Diversification: Different countries experience business cycles at different times. When the US economy slows, emerging markets might accelerate. When US tech stocks struggle, European industrials might thrive.

Currency Diversification: If the US dollar weakens, your holdings in euros, yen, and other currencies become worth more in dollars. This provides a hedge if the US currency declines.

Sector Exposure: Some sectors concentrate outside the US. Luxury goods (LVMH, Hermès) are European. Mining and agriculture are bigger in Australia and Brazil. International ETFs give you easier access to these sectors.

Valuation Opportunities: Many international stocks trade at lower price-to-earnings ratios than US equivalents. In 2023, emerging market ETFs yielded 2-3% dividends while US growth ETFs yielded under 1%.

Types of International ETFs

International ETFs divide into several categories based on what geographic regions they track and how they manage currency risk.

Developed Markets ETFs

Developed market ETFs focus on established economies: Japan, Germany, UK, Canada, France, Switzerland, and Australia. These countries have stable regulations, strong institutions, and mature stock markets.

VXUS (Vanguard Total International Stock ETF) is the broadest developed market option, holding over 6,000 stocks across 40+ countries outside the US. The fund charges 0.08% annually ($8 per $10,000 invested). As of March 2024, VXUS held approximately 45% in European stocks, 35% in Asia-Pacific, and 20% in other regions.

IEFA (iShares Core MSCI EAFE ETF) tracks more established developed markets (Europe, Australasia, Far East). EAFE stands for Europe, Australasia, and Far East—a traditional developed markets definition. It holds fewer stocks (roughly 900) than VXUS and charges 0.07% annually. Its largest holdings are Nestlé (Switzerland), ASML (Netherlands), and Samsung (South Korea).

Developed market ETFs are less volatile than emerging markets but historically deliver 6-8% annual returns. They're appropriate for conservative investors or those nearing retirement.

Emerging Markets ETFs

Emerging markets are countries with developing economies but rapid growth potential: Brazil, China, India, Mexico, and South Korea. These markets offer higher growth but face greater political and currency risk.

VWO (Vanguard FTSE Emerging Markets ETF) tracks 2,000+ companies in 24 emerging markets. Brazil and China each represent roughly 25% of holdings. The fund charges 0.08% annually. In 2023, VWO returned 18.7% (after a brutal 2022 where it fell 28%).

IEMG (iShares Core MSCI Emerging Markets ETF) is larger by assets under management ($30+ billion vs VWO's $20+ billion) but similar in structure. Both funds concentrate heavily in China and India, since those economies represent the largest emerging markets by capitalization.

Emerging market ETFs suit investors with 10+ year time horizons who can tolerate 20-30% annual swings. A 35-year-old might allocate 5-10% of stocks to emerging markets; a 65-year-old might avoid them entirely.

Specific Country or Regional ETFs

Some investors prefer narrower focus. EWJ (iShares MSCI Japan ETF) tracks 200+ Japanese companies, giving targeted exposure to the world's third-largest economy. It charges 0.48% annually and held about $8 billion in assets as of 2024.

EWG (iShares MSCI Germany ETF) focuses on German companies like Siemens and SAP. EWU (iShares MSCI United Kingdom ETF) tracks British stocks including HSBC and Shell.

These single-country ETFs are riskier because they lack diversification. If Japan enters recession, EWJ suffers regardless of global conditions. They work best as satellite positions (5-10% of your international allocation) rather than core holdings.

Hedged vs. Unhedged International ETFs

This distinction matters more than many new investors realize. When you buy an unhedged international ETF, you get two exposures: the stock market and currency fluctuations.

Unhedged Example: You buy 100 shares of VXUS at $50 (total: $5,000) when the euro trades at 1.10 (meaning 1 euro = $1.10). Six months later, VXUS's underlying holdings gain 5%, pushing the fund value to $52.50. But the euro weakens to 1.05. Your shares are worth $52.50 × 100 = $5,250, but that euro weakness means each share is worth slightly less in dollars. Your return might be 4% instead of 5%.

Currency hedged versions—like VTIAX (Vanguard International Stock ETF), which is dollar-hedged—remove this currency component. VTIAX charges 0.08% annually and lets you focus purely on stock performance without currency noise.

Should you use hedged or unhedged? Most investors use unhedged because currency movements average out over long periods, and hedging adds costs. However, if you believe the US dollar will strengthen significantly, a hedged fund protects you.

Key Metrics and Comparison Table

When evaluating international ETFs, compare these factors:

Data as of March 2024. Assets and holdings subject to change.

Expense Ratios Matter More Than You Think

The difference between a 0.07% expense ratio and a 0.48% ratio looks small—0.41 percentage points. Over 30 years with 7% annual returns, that difference compounds into 10-12% lower returns.

Suppose you invest $10,000 in two identical funds with different fees. Fund A charges 0.08%, Fund B charges 0.48%.

After 30 years at 7% annual returns:

• Fund A (0.08% fee): $74,122
• Fund B (0.48% fee): $70,355
• Difference: $3,767 (5% of returns lost to higher fees)

This is why IEFA (0.07%) and VXUS (0.08%) are preferred over narrower options like EWJ (0.48%) for core international holdings.

Fund Size and Liquidity

Larger ETFs offer better liquidity—the bid-ask spread (the difference between buying and selling prices) stays tight. IEFA has $350 billion in assets and typically trades with a 0.01% spread. Smaller ETFs might have 0.10% spreads, costing you real money on entry and exit.

For positions under $50,000, this difference is negligible. For $500,000 positions, tighter spreads matter significantly.

Currency Risk: Understanding the Hidden Factor

This is the aspect that catches most beginning international investors off-guard. Currency movements can enhance or diminish your returns independent of the underlying stocks' performance.

How Currency Affects International Returns

Scenario: VXUS investment with euro exposure

January 2023: You buy VXUS when it trades at $95. The euro/dollar exchange rate is 1.10 (1 euro = $1.10).

January 2024: The underlying European stocks in VXUS gain 10%. You'd expect VXUS to trade at $104.50. But the dollar has strengthened; the euro now trades at 0.95. This 13% dollar appreciation cuts into your euro-denominated returns.

Your actual VXUS return: approximately 3% instead of 10%.

Conversely, if the dollar had weakened to 1.20, your return would be 23% (the 10% stock gain plus currency appreciation).

Long-Term Currency Averaging

Over decades, currencies don't trend in one direction indefinitely. The dollar strengthened from 2014-2016, weakened from 2017-2018, strengthened again from 2021-2023, and has shown mixed signals since. By holding international ETFs for 20+ years, currency volatility averages out, and you capture returns from actual economic growth rather than currency speculation.

For shorter time horizons (5 years or less), currency can meaningfully impact your results. This is where hedged versions like VTIAX become relevant.

Allocation Strategy: How Much International Exposure?

The right amount depends on your time horizon, risk tolerance, and geographic exposure in your job.

Common Allocation Models

Conservative (Age 60+): 10-15% international stocks. You prioritize stability and don't need high growth. Example: 85% US stocks (through VTI or VOO), 15% international (through VXUS).

Moderate (Age 40-59): 20-30% international stocks. You balance growth with stability. Example: 70% US, 25% developed international, 5% emerging markets.

Aggressive (Age 25-39): 30-40% international stocks. You prioritize growth and can tolerate volatility. Example: 60% US, 25% developed international, 15% emerging markets.

Global Diversification (All Ages): Some investors simply mirror global market capitalization. Since US represents 60% of global market value, they hold 60% US and 40% international. This "World Portfolio" requires minimal decision-making.

Practical Implementation

You don't need multiple international ETFs. A single broad fund like VXUS covers everything. If you want emerging market exposure specifically, add VWO.

Sample portfolio for 35-year-old:

• $50,000 in VTI (US total market): $38,000
• $10,000 in VXUS (international total market): $5,000
• $2,000 in VWO (emerging markets): $2,000
• $10,000 in bonds (BND): $10,000
• Total: $65,000

Allocations: 58% US stocks, 8% developed international, 3% emerging, 15% bonds. This balances growth with diversification.

Currency-Specific Strategies

Beyond simple buy-and-hold, some investors consider currency views when allocating to international ETFs.

When to Use Hedged ETFs

Choose hedged versions (like VTIAX instead of VXUS) if:

• You believe the US dollar will significantly strengthen (next 3-5 years)
• You're nearing retirement and want to minimize uncontrollable variables
• You're already earning foreign currency income and want to avoid doubling up on currency risk
• You're holding international bonds and want stock returns uncorrelated with currency moves

Stay with unhedged if you believe the dollar will weaken or you want currency diversification as a hedge to US-centric assets.

Multi-Currency Exposure Through ETFs

By holding VXUS, you automatically gain exposure to roughly 50 different currencies. When you rebalance or add money, you're constantly "averaging" exchange rates—buying more shares when currencies are expensive, fewer when they're cheap. This is dollar-cost averaging for currencies.

Common Mistakes and Pitfalls to Avoid

Mistake 1: Overweighting Emerging Markets Without a Long Time Horizon

Emerging market ETFs like VWO are volatile. From 2021-2022, VWO fell 28%. Many investors panic-sold at the bottom, locking in losses. Unless you have 10+ years before needing the money, emerging markets should be a small position (under 5% of your overall portfolio).

Mistake 2: Chasing Hot Markets

When China boomed in 2020-2021, investors flooded into VWO. Then China imposed tech regulations in 2021-2022, and the fund crashed. Broad diversification prevents this. VXUS avoids the pitfall by holding everything rather than betting on one region.

Mistake 3: Ignoring Your Job's Already-Implicit Exposure

If you work for Google (GOOGL) or Microsoft (MSFT), your paycheck and stock options are concentrated in US tech. Adding more US-heavy investments doubles down on this risk. You might benefit from overweighting international to diversify.

Mistake 4: Frequent Trading Based on Currency Moves

If VXUS drops 5% because the dollar strengthened but the underlying stocks were unchanged, many new investors sell. This locks in currency losses and generates taxes unnecessarily. Currency movements are noise; focus on long-term stock market fundamentals.

Mistake 5: Buying Individual Country ETFs Without Rebalancing

If you buy EWJ (Japan), EWG (Germany), and EWU (UK) separately without a plan, you'll end up overweighting whatever performed best. Broad ETFs (VXUS) automatically rebalance by market cap, keeping your allocation aligned.

Mistake 6: Not Understanding Fee Drag

A 0.48% annual fee on international stocks might seem small, but it compounds dramatically. On a $100,000 international position over 20 years, 0.40% extra fees costs roughly $8,000-10,000 in foregone returns. Choose low-cost providers (Vanguard, iShares) over specialty managers.

Tax Considerations for International ETFs

Foreign Dividend Tax Credits

When international companies pay dividends, many countries withhold taxes (typically 10-15%). The US has tax treaties with most countries that reduce this withholding, but not to zero.

VXUS and other major international ETFs automatically handle this for you—they receive the dividend, withholding has already happened, and they distribute the after-tax proceeds. In taxable accounts, you can claim foreign tax credits on your US tax return (Form 1118) to avoid double taxation. In retirement accounts (401k, IRA), you can't claim credits, so the foreign withholding effectively reduces returns.

Tax-Loss Harvesting Opportunities

When VXUS drops 20%, you can sell it at a loss, claim the tax deduction against other gains, and immediately buy IEFA (which tracks a similar but not identical index). This locks in the tax loss while maintaining your international exposure.

Be aware of IRS "wash-sale" rules—you can't buy the same fund back within 30 days of the loss. But VXUS and IEFA are different funds, so this works.

How to Buy International ETFs

Step 1: Open a Brokerage Account with a major provider (Fidelity, Charles Schwab, Vanguard, or your bank). All offer commission-free ETF trading.

Step 2: Search for Your Fund by ticker (VXUS, IEFA, VWO). You'll see real-time price, holdings, performance history, and expense ratio.

Step 3: Place an Order just like you would for stocks. Use a "limit order" (specifying the exact price you'll accept) rather than a market order for tight bid-ask spreads. For large ETFs like VXUS, the spread is under $0.05 per share anyway.

Step 4: Set Up Automatic Contributions (if your broker allows). Many platforms let you schedule monthly or quarterly purchases into specific funds, enabling dollar-cost averaging without the need to time markets.

Step 5: Review and Rebalance Annually. If your target is 25% international but market returns have pushed it to 28%, sell some US stocks and buy international to rebalance.

Real-World Example: Building an International Position

Meet Alex, 32 years old, with a $50,000 lump sum to invest. Alex works in the US tech industry and already has significant US exposure through salary and stock options.

Alex's allocation decision:

• $20,000 (40%) to VTI (US total market)
• $22,500 (45%) to VXUS (international total market)
• $5,000 (10%) to VWO (emerging markets)
• $2,500 (5%) to BND (bonds)

Rationale: Alex deliberately underweights US relative to market capitalization because of existing tech exposure through employment. The 45% international allocation provides meaningful geographic diversification. VWO is included but modest—only 10%—because emerging markets are volatile and Alex may need parts of this money within 7-10 years for a house down payment.

After one year (sample performance):

• VTI (US): +15% → $23,000
• VXUS (International): +8% → $24,300
• VWO (Emerging): +12% → $5,600
• BND (Bonds): +2% → $2,550
• Total: $55,450 (11% gain)

New allocation: 42% US, 44% international developed, 10% emerging, 4% bonds

Alex's portfolio drifted 2% toward US (due to outperformance). During annual review, Alex rebalances: selling $1,100 of VTI and buying $1,100 of VXUS. This brings allocations back to target without drastically changing the portfolio.

Five years later, this disciplined approach has allowed Alex to capture both US and international returns, benefit from automatic rebalancing, and maintain intentional diversification despite employment concentration in tech.

Frequently Asked Questions About International ETFs

Next Steps: Putting It Into Action

Now that you understand international ETFs, the mechanics, and common pitfalls, here's how to implement this knowledge:

1. Define your target allocation. Using the age-based guides above, determine what percentage of your stock portfolio should be international (most investors: 20-30%).
2. Choose your core fund. Unless you have strong emerging market convictions, VXUS alone is sufficient. It's cheap (0.08%), broad (6,000+ holdings), and liquid ($105B in assets).
3. Open a brokerage account (if you don't have one) at Fidelity, Schwab, or Vanguard. All offer commission-free trading.
4. Buy your first shares. Start with a position and then add systematically over 3-6 months through dollar-cost averaging if the amount is substantial ($50,000+).
5. Automate contributions. Set up monthly or quarterly contributions to VXUS. This removes emotion and locks in discipline.
6. Review annually. Check performance, rebalance if drift exceeds 5%, and consider tax-loss harvesting if positions are underwater.
7. Avoid frequent trading. International funds are meant for long-term holding. Currency volatility and market noise will create urges to sell. Resist them.

Conclusion: Why International Diversification Matters

International ETFs transform global diversification from complex and expensive to simple and cheap. For roughly $8 per $10,000 annually (through VXUS), you gain exposure to 40% of the world's stock market, currencies that may move differently than the dollar, and companies in sectors dominated outside the US.

The 60/40 US-to-international split that made sense for investors 30 years ago misses today's realities: emerging markets have matured, valuations vary dramatically by region, and currency movements provide real hedging benefits.

Whether you allocate 20%, 30%, or even 50% to international equities, the mechanism is identical—purchase shares of a low-cost ETF and hold for decades. The result is a portfolio that benefits from global economic growth rather than betting entirely on US prosperity.

This article is part of Ticker Daily's complete guide to ETFs. For more foundational information, see our How to Trade and Invest in ETFs hub.