At the start of each new year, there are regular predictions that international equity markets will outperform U.S. large-cap ones. Experts point to the relatively attractive valuation of Europe and Japan stocks compared to those in the U.S. However, when we look back, this outperfomance fails to happen. But will 2025 actually be different?
The Vanguard FTSE Developed Markets ETF (VEA ) lagged behind the SPDR S&P 500 ETF (SPY ) in four of the last five calendar years. Only in 2022, when U.S. equities declined sharply did developed equity markets hold up better. However, VEA was up 6.3% year to date as of February 12, outpacing SPY’s 3.0% gain.
Are You Underexposed to International Equities?
Historically, many model portfolios had 20%-25% of assets dedicated to international equities to provide global diversification. However, after the strong run for the S&P 500 and other U.S. benchmarks the last few years, many people came into 2025 underexposed.
In the first six weeks of 2025, we have seen some advisors leaning into developed international equity ETF. For example, the iShares Core MSCI International Developed Markets ETF (IDEV ), the SPDR Developed World Ex-US ETF (SPDW ), and VEA all gathered more than $1 billion each. That’s encouraging.
International Equity Landscape
These ETFs are market-cap-weighted and cheap. SPDW and VEA have 0.03% expense ratios, following Vanguard’s recent fee cut. IDEV charges 0.04%. Yet there are differences. For example, SPDW and VEA have exposure to South Korea stocks like Samsung Electronics, while IDEV does not.
VEA is the largest international equity ETF, with over $140 billion in assets. The second-largest fund, the iShares Core MSCI EAFE ETF (IEFA ), has $125 billion, but it is primarily focused on developed Europe and Asia. Unlike IDEV, SPDW and VEA, IEFA does not have exposure to Canada stocks.
Should You Turn to an Active Manager as Your International Equity Guide?
While most of the assets invested in developed international equity ETFs are tracking an index, many actively managed products are now available from firms that advisors and investors have turned to for their U.S. equity exposure.
The Avantis International Equity ETF (AVDE ) is a good example. The fund follows a similar approach as the Avantis U.S. Equity ETF (AVUS ). The Avantis approach is to overweight securities that management believes are trading at lower valuations with higher profitability ratios. The Avantis funds also tend to have low turnover rates and country and sector exposures similar to market-cap-weighted ETFs.
Bottom-Up Approach Matters With Active International ETFs
However, market-cap-weighted international ETFs have ASML and SAP as their two largest holdings, as of mid-February. Meanwhile, ADVE favored Novo Nordisk and Roche Holdings. The Dimensional International Core Equity 2 ETF (DFIC ) and the JPMorgan International Research Enhanced Equity ETF (JIRE ) also offer benchmark-aware, well-diversified active ETFs.
Meanwhile, the T. Rowe Price International Equity ETF (TOUS ) takes a more bottom-up approach than some of its active peers. The top 10 holdings for TOUS, as of mid-February, included Deutsche Telekom, Rolls Royce, and UniCredit, which are not similarly found in the market-cap index ETFs. TOUS was up 8.3% year to date, as of February 12. TOUS launched in 2023.
New International ETF Entrant
One new active international equity ETF to watch is the Thornburg International Equity ETF (TXUE). The fund launched in January 2025, but the Thornburg name is likely familiar to many fans of active management. The ETF’s top holdings include E.ON, Orange, and Safran. Thornburg has a long and strong history of supporting international equity investors through mutual funds.
At the Exchange conference on March 24, we will be having a panel titled “International Equity: Time to reduce your home bias”. I hope to see you there. Are you registered?
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