In an investment landscape where U.S. equities have seen a remarkable ascent over the past three years, displaying consistent double-digit growth, a growing number of financial experts are signaling caution due to what they perceive as inflated valuations. This context brings to light the Vanguard Total International Stock ETF (VXUS) as a potentially astute choice for investors looking beyond the domestic market. With its attractive valuation, diverse sector exposure, and alignment with global economic trends, VXUS offers a compelling alternative for those seeking to balance their portfolios and tap into broader growth opportunities.
The current market climate sees the S&P 500 index completing its third consecutive year of over 15% total returns, with an additional 2% increase already recorded for the beginning of 2026. This impressive performance, however, has led to a significant escalation in U.S. stock prices, prompting concerns about their sustainability. For instance, the Vanguard S&P 500 ETF (VOO) is presently trading at a price-to-earnings (P/E) multiple exceeding 28, while the Vanguard Information Technology ETF (VGT) stands even higher at nearly 39 times earnings. Historically, such high P/E ratios for the S&P 500 have only been observed during unique economic periods like the dot-com bubble, the financial crisis, and the initial phase of the COVID-19 pandemic. This suggests that the American stock market may be nearing a peak, driving investors to consider alternative, more value-oriented investments.
A notable trend among investors is a shift towards assets perceived as having greater value. This includes a move into defensive sectors such as consumer staples and utilities, low-volatility stocks, and small-capitalization companies. Furthermore, there's been an increasing interest in international markets, which appear to offer more favorable valuations compared to their U.S. counterparts. International stocks are currently trading at substantial discounts relative to the S&P 500, boasting a more robust future growth outlook and supportive monetary policy conditions. Although these global equities performed well in 2025, the Vanguard Total International Stock ETF (VXUS) is positioned for a prolonged period of superior performance.
The appeal of international stocks extends beyond their lower valuations. The Vanguard Total International Stock ETF, for example, has a P/E ratio of just 17, making it approximately 40% more affordable than the S&P 500. Beyond this quantitative advantage, international markets present distinct sector allocations, more optimistic economic growth forecasts, and a monetary policy environment that is arguably more conducive to growth. The International Monetary Fund (IMF) projects the United States economy to grow by 2.4% in 2026, which, while respectable, is outpaced by the anticipated 4.2% growth in emerging markets, with Asia expected to lead with 5% growth. Given the central role these economies play in artificial intelligence (AI) innovation, they are poised to be significant drivers of global economic expansion in the foreseeable future.
Investing in international markets through a fund like VXUS also provides a strategic diversification away from the concentrated, tech-heavy composition prevalent in the S&P 500. VXUS's top sector holdings include financials (23%), industrials (15%), technology (14%), and consumer discretionary (10%), offering a broader and more balanced exposure. This contrasts with the highly concentrated technology focus of the S&P 500. As the market diversifies and a wider array of companies demonstrate strong performance, more broadly diversified funds may gain an upper hand. Additionally, monetary policy conditions and the strength of the dollar could further benefit international investments. While many central banks abroad have paused their interest rate reduction cycles, there is a general inclination to implement further cuts if necessary, with China actively easing conditions. In contrast, the Federal Reserve appears to be nearing the end of its rate-cutting phase, with futures markets predicting only one or two potential cuts in 2026, a forecast that continues to diminish. Regions with lower borrowing costs could thus enjoy a competitive edge.
The Vanguard Total International Stock ETF tracks the FTSE Global All Cap ex-US Index, encompassing a broad spectrum of companies in both developed and emerging markets outside the U.S. The index employs a market cap-weighted approach, resulting in a significant tilt towards large-cap companies. Its primary holdings include industry giants such as Taiwan Semiconductor Manufacturing, Tencent Holdings, ASML Holding, Samsung Electronics, and Alibaba. True to Vanguard's reputation, VXUS boasts a remarkably low expense ratio of 0.05%, positioning it among the most cost-effective ETFs in its category. With an approximate 75%/25% split between developed and emerging markets, the ETF offers investors exposure to two distinct risk/reward profiles. While many international stock ETFs favor developed markets and minimize exposure to the higher-growth, higher-risk emerging markets, VXUS deliberately includes a substantial allocation to the latter, which is particularly advantageous given current global economic dynamics. The most significant benefit, however, might be the overall value offered. Historical data suggests that future stock returns tend to be lower when initial valuations are high. International stocks, starting from a much lower valuation point, offer a crucial counterbalance to potential valuation concerns within a U.S.-centric portfolio and could be poised for an extended period of superior investment performance.