For many beginners, investing starts and ends with the US stock market. The S&P 500 is familiar, widely covered, and has delivered strong returns for decades. This often leads to a simple question: Is investing outside the US actually necessary?
International ETFs exist for a reason. Global portfolios behave differently from US-only portfolios, especially over long periods. The challenge is understanding when international exposure helps, when it disappoints, and how much is reasonable.
This article explains how US and international ETFs fit into a global portfolio, using real data, real funds, and realistic trade-offs.
US equity markets have been unusually strong over the past decade.
From 2010 to 2020, the S&P 500 significantly outperformed most international markets. Large US companies benefited from technology dominance, high margins, and strong capital markets. This period shaped investor expectations.
However, this performance is not permanent.
Looking at a longer history tells a different story. From 2000 to 2010, US stocks underperformed international developed markets. The S&P 500 delivered near-zero real returns over that decade, while international equities performed better in several regions.
Leadership rotates.
Global markets move in cycles driven by valuations, currencies, demographics, and economic growth. A portfolio concentrated in one country implicitly bets that leadership will never change.
US ETFs typically represent high-quality, liquid exposure to large companies.
Common examples include broad market ETFs tracking US equities, such as total market or large-cap funds. These ETFs benefit from strong corporate governance, deep liquidity, and shareholder-friendly practices.
Many global companies are already included in US indexes, but their revenues are not the same as geographic diversification. A US company earning revenue abroad is still priced in US dollars and influenced by US market conditions.
International ETFs provide exposure to companies listed outside the U.S.
These include developed markets such as Europe, Japan, and Australia, as well as emerging markets like China, India, Brazil, and Taiwan.
Examples of widely used international ETFs include the Vanguard FTSE All-World ETF, iShares Core MSCI World ETF, and regional funds covering Europe or emerging markets.
These ETFs hold hundreds or thousands of companies and are designed to track global market capitalization outside a single country.
One reason international ETFs underperform in some periods is valuation.
US equities have often traded at higher price-to-earnings ratios than international markets. High valuations can support strong performance for long periods, but they also increase sensitivity to earnings disappointments and interest rate changes.
International markets frequently trade at lower valuations. This can reduce downside risk but also reflects slower growth, weaker governance in some regions, or structural challenges.
Currency effects also matter.
US-based investors buying international ETFs are exposed to foreign currencies. When the US dollar strengthens, international returns measured in dollars may suffer. When the dollar weakens, international assets benefit.
Currency exposure adds volatility, but it also provides diversification. Over long periods, currency cycles can improve portfolio balance.
Another consideration is sector composition.
US markets are heavily weighted toward technology and consumer discretionary sectors. International markets have higher exposure to financials, industrials, energy, and materials.
This difference matters in different economic environments. Technology tends to outperform in growth-driven periods. Energy and materials often perform better during inflationary or commodity-driven cycles.
A global portfolio reduces reliance on any single sector.
Emerging markets deserve special mention.
Emerging market ETFs provide exposure to faster-growing economies but come with higher political, regulatory, and governance risk. Volatility is higher, and drawdowns can be severe.
Historically, emerging markets have experienced long periods of underperformance followed by sharp rallies. Timing these cycles is difficult.
Many long-term investors include emerging markets as a small allocation rather than a core holding.
Costs are another factor.
US ETFs are often extremely cheap, with expense ratios as low as 0.03%. International ETFs are usually slightly more expensive, often ranging from 0.07% to 0.25%, depending on region and structure.
This cost difference matters, but it is small compared to the diversification benefit over long horizons.
Tax treatment varies by investor location.
For non-US investors, US-domiciled ETFs can create withholding tax issues on dividends and estate tax exposure. Many international investors prefer UCITS ETFs domiciled in Ireland or Luxembourg to simplify taxation.
For US investors, foreign tax credits may partially offset withholding taxes from international dividends, depending on the account type.
Understanding ETF domicile matters as much as understanding geography.
Another mistake beginners make is confusing global ETFs with international ETFs.
A global ETF includes the US. An international ETF excludes it. Using both without understanding the overlap can distort allocations.
For example, a portfolio holding a US total market ETF and a global ETF may unintentionally overweight US equities.
Clarity matters.
So, how much international exposure makes sense?
There is no universal answer. Global market capitalization weights typically allocate around 55–60% to the US and 40–45% to non-US markets. This reflects current market values, not forecasts.
Some investors prefer a home-biased approach, such as 70% US and 30% international. Others follow market weights more closely.
What matters is consistency.
Changing allocations based on recent performance often leads to buying after outperformance and selling after underperformance.
A simple global portfolio might look like this:
– 60% US equity ETF
– 30% developed international equity ETF
– 10% emerging markets ETF
Another approach uses a single global ETF that automatically adjusts weights over time. This reduces complexity but limits customization.
Both approaches can work.
The biggest risk is not choosing the “wrong” allocation. It is abandoning diversification during periods when international markets lag.
International exposure tests patience.
There have been long stretches where US-only portfolios outperformed. Investors who abandoned international exposure during those periods often regretted it later when leadership rotated.
Diversification works by disappointing you at different times.
That is its purpose.
A global portfolio does not maximize returns in every period. It reduces reliance on a single outcome.
For long-term investors, this trade-off is usually worth it.
US markets remain a powerful engine of growth. International markets add balance, valuation diversification, currency exposure, and sector variety.
Building a global portfolio is not about predicting which country will win next. It is about reducing the risk of being wrong.
FAQ
Do international ETFs always improve returns?
No. They improve diversification, not guaranteed performance.
Is the US market already global enough?
US companies earn global revenue, but pricing, currency, and regulation remain US-centric.
How much international exposure is reasonable?
Many investors choose between 20% and 40%, depending on preference and location.
Are emerging markets necessary?
Not required, but small allocations can add diversification and long-term upside.
Is one global ETF enough?
For many investors, yes. It offers simplicity and automatic rebalancing.