Investing | August 17, 2026 | Capstag.com | 12 min read
How to Invest in International Stocks and ETFs
Most investors know they should have international exposure in their portfolio. Most also have far less than they should — or none at all. After a decade of US market dominance, many investors have forgotten the case for global diversification. In 2025 and 2026, that case has been making itself felt again, loudly.
Quick Answer: To invest in international stocks, the simplest and most cost-effective approach for most investors is through a diversified international ETF rather than picking individual foreign stocks. The Vanguard Total International Stock ETF (VXUS) covers over 8,600 stocks across developed and emerging markets for a 0.05% expense ratio. For developed markets only, IEFA (iShares, 0.07%) and SCHF (Schwab, 0.03%) are widely used alternatives. According to Fidelity's 2026 guidance, a common allocation target is 70% US and 30% international within the equity portion of a portfolio — representing roughly 20–40% of total equity exposure allocated to non-US markets.
An investor whose portfolio consists entirely of US stocks is making a concentrated bet on a single country — the world's largest economy, yes, but still one country representing roughly 60% of global market capitalisation. The other 40% of global equity value sits in markets from Japan to Germany to Brazil to India, and those markets do not move in perfect lockstep with the US. That non-correlation is precisely where international diversification adds value. According to Morningstar's analysis published in April 2026, international equity ETFs have been delivering some of their strongest returns in recent years, with the MSCI All Country World ex-USA Index outperforming the S&P 500 by double-digit percentage points in 2025. The case for international allocation is not theoretical — it is currently unfolding in real portfolio returns.
Why Invest in International Stocks?
International investing spreads portfolio exposure across multiple economies, regulatory environments, and business cycles rather than depending on a single country's market conditions. According to Vanguard's investor education resources, markets outside the United States do not always rise and fall at the same time as the domestic market, which means owning international securities alongside US holdings can reduce the overall volatility of a portfolio through the periods when US and international markets move in different directions.
Three specific arguments make the case for international allocation particularly strong in the current environment.
Valuation Gap
According to Fidelity's institutional research published in March 2026, foreign large-cap stocks recently traded at approximately a 30% discount to US stocks on a forward price-to-earnings ratio comparison and a more than 50% discount on a price-to-book basis. The MSCI EAFE index, which tracks international stocks from developed countries outside the US, traded at just over 15 times forward earnings as of early 2026 — compared to approximately 23 times for the average S&P 500 stock. This valuation gap does not guarantee international outperformance on any specific timeline, but it does represent a meaningful margin of safety for investors adding international exposure at current levels.
Dividend Income Advantage
According to The Motley Fool's July 2026 analysis of international ETFs, many international markets — particularly in Europe and parts of Asia — have a stronger dividend culture than the US, resulting in above-average portfolio yields for many international ETFs. The MSCI EAFE index carried a dividend yield of approximately 3.4% as of early 2026, compared to approximately 1.5% for the S&P 500. For income-oriented investors, international exposure meaningfully increases portfolio yield without requiring a shift into bonds or other fixed-income instruments.
Currency Tailwind
When the US dollar weakens relative to foreign currencies, US-based investors holding unhedged international assets benefit — the same foreign returns translate into more dollars when converted back. According to Fidelity's analysis, the US dollar declined approximately 10% against a basket of foreign developed-market currencies in 2025, directly boosting the dollar-denominated returns of international equity funds for US investors. As of mid-2026, that dollar weakness has continued, maintaining the currency tailwind for unhedged international positions.
Developed Markets vs Emerging Markets: What Is the Difference?
International investment falls into two broad categories, and understanding the distinction matters for risk and return expectations.
Developed markets include wealthy, economically stable countries with well-established financial systems — primarily Western Europe, Japan, Australia, Canada, and a handful of other high-income economies. The MSCI EAFE Index (Europe, Australasia, and Far East) is the most widely tracked developed-market benchmark. Developed-market stocks carry lower growth potential than emerging markets but also lower volatility, stronger regulatory frameworks, and more predictable currency dynamics.
Emerging markets include countries at earlier stages of economic development with higher growth potential and higher risk — China, India, Brazil, South Korea, Taiwan, and several others. The MSCI Emerging Markets Index tracks this universe. Emerging-market stocks have historically delivered higher long-run returns than developed markets, but with meaningfully deeper drawdowns and higher volatility. Currency risk is also more pronounced in emerging markets, as many of these currencies are less stable than the euro or Japanese yen.
Which Should You Own? For most individual investors building a diversified global portfolio, a single broad international fund like VXUS — which covers both developed and emerging markets automatically in proportion to their global market capitalisation — is the simplest and most complete approach. Investors who want to specifically manage their emerging-market exposure can use a developed-market-only fund (IEFA or VEA) for core international exposure and add a separate emerging-market fund (VWO or IEMG) at their preferred weight.
Best International ETFs for Long-Term Investors in 2026
| ETF | Ticker | Coverage | Expense Ratio | Holdings |
|---|---|---|---|---|
| Vanguard Total International Stock ETF | VXUS | Developed + Emerging (ex-US) | 0.05% | 8,600+ |
| iShares Core MSCI EAFE ETF | IEFA | Developed markets only (ex-US) | 0.07% | ~3,000 |
| Schwab International Equity ETF | SCHF | Developed markets (mid + large cap) | 0.03% | ~1,500 |
| Vanguard FTSE Emerging Markets ETF | VWO | Emerging markets only | 0.08% | ~5,500 |
| iShares Core MSCI Emerging Markets ETF | IEMG | Emerging markets only | 0.09% | ~2,700 |
| Schwab International Dividend Equity ETF | SCHY | International dividend stocks | 0.08% | 100 |
According to Morningstar's April 2026 international ETF analysis, IEFA earns a Silver Medalist Rating and yielded approximately 3.2% over the twelve months through February 2026 — making it a well-diversified total return play at a very low cost. The Schwab International Dividend Equity ETF (SCHY) carried a 30-day SEC yield of 3.76% as of July 2026 per The Motley Fool, making it particularly relevant for income-focused investors seeking higher yield than the US market currently offers.
Currency Risk: The Risk That Never Appears on a Stock Chart
Currency risk — also called exchange rate risk — is the possibility that movements in foreign exchange rates will affect the value of an international investment independent of how the underlying stocks perform. When an investor based in the US holds an unhedged international ETF, they hold two simultaneous bets: one on the performance of foreign stocks, and one on the relative strength of the US dollar versus the currencies those stocks are denominated in.
Currency movements can amplify or diminish international returns. In 2025, the dollar's 10% decline against developed-market currencies boosted international ETF returns for US investors — a tailwind. In years when the dollar strengthens, the opposite occurs — international stocks can rise in local currency terms while the dollar-denominated return for a US investor is negative or flat. According to Vanguard's investor education resources, this additional source of volatility is inherent in unhedged international investing and cannot be eliminated without using a currency-hedged fund, which typically carries a higher expense ratio to cover the cost of the hedging programme.
Hedged vs Unhedged International ETFs: Currency-hedged international ETFs (such as HEFA for developed markets) remove the foreign-exchange variable, allowing investors to isolate the stock market returns of international companies without the currency bet. For most long-term investors, unhedged exposure is generally recommended — currency movements tend to mean-revert over long periods, and the cost of hedging reduces long-term returns without a clear benefit over time horizons of ten years or more. Hedged funds are most relevant for shorter time horizons or when the dollar is expected to strengthen significantly.
How to Access International Stocks: Four Methods
International ETFs and Index Funds
The most practical approach for most individual investors. A single broad international ETF like VXUS provides exposure to over 8,600 foreign stocks across dozens of countries in one transaction, at minimal cost, without requiring knowledge of foreign exchanges, foreign currency transactions, or individual foreign company analysis. This is the approach recommended by virtually every major brokerage's investor education resources as the starting point for international exposure.
American Depositary Receipts (ADRs)
ADRs are certificates issued by US banks that represent shares in a foreign company, trading on US exchanges in US dollars. They allow US investors to buy shares in individual foreign companies — such as Nestlé, Toyota, or ASML — without opening a foreign brokerage account. ADRs are subject to the same SEC reporting requirements as US-listed stocks, which provides an additional layer of transparency. The trade-off is that ADRs cover only a subset of foreign companies — primarily the largest multinationals — and they still carry currency risk embedded in the conversion.
Foreign-Listed Stocks via International Brokerage Access
Some brokerages provide direct access to foreign exchanges, allowing investors to buy shares of foreign companies that are not listed on US exchanges. This provides access to a broader universe of international companies — including mid- and small-cap stocks that do not have US ADRs — but involves foreign currency transactions, potentially higher trading costs, and more complex tax reporting.
Mutual Funds with International Mandates
Actively managed international mutual funds employ portfolio managers focused on international stock selection. According to Fidelity's analysis, international mutual funds often carry higher expense ratios because they involve more active management, research, and operational costs. For most cost-conscious individual investors, passive international ETFs deliver comparable or superior long-term results at a fraction of the cost.
How Much of Your Portfolio Should Be International?
There is genuine debate among financial professionals about the optimal international allocation, and the honest answer is that there is no universally correct number. According to Fidelity's guidance, Strategic Advisers often uses a guideline of a 70% US, 30% international allocation within the equity portion of a portfolio — meaning a portfolio with 60% total equity and 40% bonds would hold approximately 18% of total assets in international stocks. According to The Motley Fool's July 2026 guidance, for most long-term investors a reasonable target is roughly 20% to 40% of total equity exposure in international markets.
From a Risk Management Perspective: The most common mistake among US-based investors is not the complete absence of international exposure, but holding far less than the 20–40% target that most research supports. A 5% or 10% allocation to a single international ETF provides some diversification but not enough to meaningfully reduce dependence on the US market's performance. Building toward a deliberate, sustained international allocation of 20–30% of equity holdings — maintained through rebalancing rather than allowed to drift — is the approach that actually delivers the diversification benefit the research supports.
The Tax Consideration for International Investments
International ETFs and stocks held in a taxable brokerage account come with an additional tax benefit not available from US-only investments: the foreign tax credit. Most foreign governments withhold a percentage of dividends paid to US investors — typically 15–25% depending on the country. US investors can typically claim this withheld amount as a credit against their US tax liability through Form 1116, reducing the effective double-taxation of international dividends. This benefit is only available on investments held in a taxable account — international holdings inside a Roth IRA or traditional IRA cannot claim the foreign tax credit, which is a reason some investors prefer to hold international funds in taxable accounts rather than inside retirement accounts.
Conclusion
International investing is not a speculative add-on to a core portfolio — it is a structural component of genuine global diversification, and one that the past two years have reminded investors can outperform US stocks significantly over meaningful periods. The valuation gap between international and US markets, the higher dividend yields available outside the US, and the currency tailwind from a weaker dollar all create a compelling environment for building or increasing international exposure through low-cost ETFs. For most investors, starting with a single broad fund like VXUS and working toward a sustained 20–30% international allocation within the equity portfolio is the most practical path to genuinely global diversification. To understand how international stocks fit into the full picture of portfolio construction, see our guide on How to Build a Stock Portfolio From Scratch.
✅ Key Takeaways
- International stocks outperformed the S&P 500 by more than 10 percentage points in 2025 and continued outperforming in early 2026, per Fidelity and Morningstar analysis
- Foreign large-cap stocks traded at approximately a 30% discount to US stocks on forward P/E and more than 50% on price-to-book as of early 2026, per Fidelity's institutional research
- VXUS (Vanguard, 0.05% ER, 8,600+ stocks) is the broadest single-fund international option; IEFA (0.07%) and SCHF (0.03%) cover developed markets only
- International dividend yields are significantly higher than the US — the MSCI EAFE yielded approximately 3.4% vs the S&P 500's 1.5% in early 2026
- Currency risk cuts both ways — dollar weakness boosted international returns in 2025; dollar strength reduces them. Long-term investors typically hold unhedged exposure
- Fidelity's guidance suggests 70% US / 30% international within the equity portfolio; most research supports 20–40% international equity allocation
- The foreign tax credit allows investors to reclaim withheld foreign dividends against their US tax bill — available on taxable account holdings, not inside Roth IRA or traditional IRA
Frequently Asked Questions
How do I invest in international stocks from the US?
The simplest approach for most US investors is buying a broad international ETF through any major brokerage account — no foreign exchange account needed. VXUS (Vanguard Total International Stock ETF) provides exposure to over 8,600 foreign stocks across developed and emerging markets in a single fund with a 0.05% expense ratio. Alternatively, individual foreign companies with US listings can be accessed through American Depositary Receipts (ADRs) on standard US exchanges.
What percentage of my portfolio should be international stocks?
According to Fidelity's Strategic Advisers guidance, a commonly used target is 30% international within the equity allocation — representing roughly 18–20% of a total portfolio with a typical stock-bond split. The Motley Fool recommends 20–40% of total equity exposure in international markets for most long-term investors. The right allocation depends on your risk tolerance, time horizon, and existing US concentration.
What is the difference between developed and emerging markets?
Developed markets include wealthy, economically stable countries with established financial systems — Western Europe, Japan, Australia, Canada. They carry lower growth potential but lower volatility. Emerging markets include countries at earlier economic development stages — China, India, Brazil, South Korea, Taiwan — with higher growth potential and meaningfully higher volatility and currency risk. A broad international fund like VXUS holds both automatically; investors can also target each separately through IEFA or VEA for developed markets and VWO or IEMG for emerging markets.
What is currency risk in international investing?
Currency risk is the possibility that movements in foreign exchange rates will affect the value of an international investment independent of how the underlying stocks perform. When the US dollar weakens, international returns are boosted when converted back to dollars. When the dollar strengthens, international returns are reduced. Most long-term investors accept this risk in unhedged international funds, since currency movements tend to mean-revert over long periods and hedging costs reduce returns without a clear benefit over ten-year-plus horizons.
Are international stocks safer than US stocks?
International stocks are not necessarily safer — they carry their own risk profile including currency risk, regulatory risk in foreign markets, and in some cases political and economic instability risks. What they offer is diversification — their returns do not move in perfect lockstep with US stocks, which reduces the overall volatility of a portfolio that holds both. The combination of US and international exposure typically produces a more resilient portfolio than either alone.
What is an ADR and how is it different from buying a foreign stock directly?
An American Depositary Receipt (ADR) is a certificate issued by a US bank that represents shares in a foreign company, trading on US exchanges in US dollars. ADRs allow US investors to buy shares in individual foreign companies without opening a foreign brokerage account or dealing with foreign currency transactions directly. They are available for most major international companies — Nestlé, Toyota, ASML, and hundreds of others. The limitation is that ADRs cover primarily the largest multinationals, not the full universe of international stocks available through a broad international ETF.
This article is for educational purposes only. The information provided reflects general financial principles and does not constitute personalised financial, tax, or legal advice. Always consider your own financial circumstances before making any decisions.
