In equity investing, the ongoing debate this year has been between leaning into domestic bias and diving into international diversification with intention. We know that good portfolio construction is all about risk management. However, finding the right balance between the two opportunity sets has been a central theme this year.
For the first time in recent memory, international equities have rewarded investors who took the plunge. That’s relative to U.S. equity returns, which have struggled to find their footing. This week, my colleague Roxanna Islam covered some top European ETFs that are standing out this year. The outperformance, broadly as a category, and specifically among international developed ETFs, has been noteworthy, no doubt.
What’s been interesting to see is that, as the year progresses and more data becomes available, that debate rages on. That’s because there’s still little visibility on what’s ahead. To quote Federal Reserve Chairman Jerome Powell this week, there’s still a lot we don’t know.
In his press conference Wednesday, following the decision to leave interest rates unchanged, Powell said that he’s “waiting for clarity” and taking a “wait and see” attitude. Why? “The effects on the economy," of potential policy changes across multiple fronts, such as trade, immigration, and fiscal policy, “remain highly uncertain,” he said. “It’s too early to know.”
That sentiment continues to fuel the call for diversification. At VettaFi, we recently ran an advisor poll asking for top concerns at the moment. It showed that advisors are first and foremost preoccupied with managing downside risk. It could be that the weakness we’ve seen in U.S. equities isn’t done yet. Diversification — regional diversification — remains a compelling call.
Leading Voices Call for Diversification
Dr. David Kelly, chief global strategist at JP Morgan Asset Management, highlighted this week the dangers of what he calls a “softer sort of slowdown” in U.S. economic momentum. Recessions come in many flavors. It’s the quieter, softer ones that can be especially damaging, leading to an “anemic” economic recovery ahead.
“This danger suggests a continuing need to add international assets to portfolios that still have a heavy overweight to U.S. stocks,” he said in his weekly comments.
Dr. Kelly isn’t alone in reiterating the call to diversify risk with international exposure. In its Q2 Market Outlook,? BlackRock echoed that call. Specifically, BlackRock said it sees a “unique set of tailwinds” for European equities in 2025. After strong performance in Q1 vs. U.S. stocks, European equities remain well positioned for further gains, the firm says.
”The valuation gap between U.S. and European stocks has narrowed from a record-wide level, yet the European discount remains historically large,” Helen Jewell, EMEA CIO, BlackRock Fundamental Equities, said in the outlook.
What’s more, investors remain largely underweight European equities following an exodus tied to the Ukraine war, Jewell said. “We see potential for the Europe convergence to continue, even in the face of tariffs,” she said.
Domestic Bias Hard To Shake
The flipside of this debate is that confidence in the resilience of the U.S. economy remains strong. Powell himself said that he has the luxury of waiting to see what happens next because the economy is strong enough to withstand uncertainty.
That strength and confidence in the U.S. economy has long supported a domestic bias. Now, however, it may be fueling a rekindled enthusiasm for the near term opportunity in U.S. stocks.
BlackRock itself, which is positive on international equities, is also bullish on the U.S. opportunity set. In its Q2 Market Outlook,? Tony DeSpirito, global CIO, BlackRock Fundamental Equities, argued that U.S. equities have “an enduring secular advantage” that is resilient even as sentiment ebbs and flows.
Quality growth and profitability, continuous innovation, as well as business-friendly policy — even if uncertain at the moment — are all supportive of U.S. equities, he said.
“While policy uncertainty in this time of transition has some companies pausing large investment decisions, we believe potential moves toward deregulation and reshoring of supply chains once policy is settled could ignite capex spending across industries, including technology and industrials,” he said in the outlook.
On a similar note, Morgan Stanley’s chief market strategist Mike Wilson made headlines this week with his latest call. He said international equity leadership, which we’ve seen so far in 2025, is about to change, according to a Marketwatch report. As he sees it, we are already late cycle, with economic growth slowing down. That’s not bad news. That’s a structural set up for quality growth to be “rewarded.”
“U.S. large cap indices stand out positively in this regard with more significant quality growth weights and lower volatility of earnings growth," he said, as reported by MarketWatch. “Late-cycle backdrop favors U.S. companies and large companies over small.”
Where Money Is Put To Work
Trends in ETF asset flows — a lagging indicator of investor demand, but a good one — confirm that appetite for U.S. equities remains unmatched by international peers in 2025.
That’s not to say that demand for international equities ETFs hasn’t materialized. Quite the contrary. It’s been robust. But domestic bias remains impressively strong.
Consider some numbers. A look at the year’s most in-demand equity ETFs have the Vanguard S&P 500 ETF (VOO ) at the top, with inflows of $57.5 billion year-to-date. That means low-cost S&P 500 exposure is the single most popular equity ETF buy this year.
Also among top equity funds are the Vanguard Total Stock Market ETF (VTI ), which has seen $14 billion in net inflows, and the SPDR Portfolio S&P 500 ETF (SPLG ) with $12.3 billion in net new assets year-to-date. These are big dollar amounts being put to work in traditional large-cap U.S. equity exposure.
The first international equity ETF to appear among the year’s most popular equity funds is the Vanguard Total International Stock ETF (VXUS ), with net gains of $5.5 billion. That’s a solid take, but it equates to just under a tenth of VOO’s asset haul. The Vanguard FTSE Europe ETF (VGK ) has picked up about $4.6 billion this year — another leading asset gatherer in the international equity space.
Domestic vs. international equity exposure isn’t an either/or debate. Portfolios often carry some of both for diversification and return opportunity. But it’s a conversation that has been especially prominent this year, given the level of policy-centered uncertainty impacting U.S. stocks this year.
As we wait for the policy dust to settle and visibility ahead to improve, this ongoing pursuit of balance between betting on U.S. resilience vs. buying heavily into international diversification should persist.
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