Can 2026 see a repeat performance for foreign equities? Many investors may be considering foreign equity index funds given continued uncertainty about domestic U.S. stocks. There is a strong case to invest in ex-U.S., foreign equities, but many investors fail to consider their options thoroughly. Active ETFs and their bottom-up investing approach and flexibility have a strong case to outperform passive peers this year.
See more: You Probably Still Have Too Much Concentration Risk: Active Investing Can Help
Yes, foreign equity index funds offer some straightforward simplicity. One can quickly combine a few index funds to craft an allocation, using single-country ETFs to do so. Still, each of those puts investors and advisors at a disadvantage relative to active alternatives due to a single key factor: risk.
Geopolitics and global financial uncertainty both loom over global markets. Investors are familiar with the factors that threaten U.S. stocks. Tariffs can arrive at seemingly any moment. Fed independence is wavering, while a slowing economy beckons. A.I. stocks face steep revenue goals to meet this calendar year.
However, ex-U.S. equities risks bear mentioning as well. U.S.-Europe tensions threaten the global financial system. The dollar, while declining to the benefit of some ex-U.S. stocks, wavers to the detriment of that same financial stability. Geopolitics, from Eastern Europe to East Asia, must always be considered.
Perhaps the most important point for investors to consider, however, is the lack of information about individual firms. Index funds are often required to simply follow their indexes, which, while often well researched, frequently default to market cap weights. Bottom-up investing instead lets the companies’ fundamental data and growth prospects guide the overall portfolio weights with some guiding principles.
By emphasizing the fundamental data in each potential stock, active ETFs can find companies able to withstand uncertainty thanks to strong cash flows, for example. At the same time, those firms can use cash flow to take advantage of opportunities and chase upside with greater alacrity than others with weaker metrics. For those investors looking for foreign equity index funds, it may pay to try active instead.
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