Dear Investor.
Zee here. Many of my students ask a version of the same question: with US debt levels climbing and markets swinging on every policy headline, should they really keep all their equity exposure in US stocks?
It's a fair concern.
The S&P 500 has delivered exceptional returns over the past decade, but that performance has come with a growing reliance on a handful of mega-cap names and a market trading at historically rich valuations, all while the US fiscal picture raises real long-term questions.
In Today’s article, we will take a closer look at international dividend and growth ETFs, and where they might fit alongside a core S&P 500 holding for investors looking to spread that risk.
This week, we welcome back our guest writer and investment analyst and our school’s mentee, Aaron. For those who dont know him, Aaron is a keen analyst who explores the global economy through the lens of human behavior and philosophy. He wishes to help readers understand market movements and make better investment decisions.
Introduction
A few weeks ago, I was asked for advice to invest some of my relative’s money after her endowment plan had matured.
The US stock market i.e. S&P500 was top of my mind as it has consistently outperformed the rest of the global stock markets, 12 out of 16 years since 2009 (global financial crisis).
However last year, international equities outperformed the US stock market by nearly 15%. This was mainly due to hostile US tariff policies, a weaker dollar, and aggressive interest rate cuts in some countries and regions. In the value investing community, this outperformance can also be viewed as capital rotation from growth into value.
My conviction in the S&P500 wavered and I wondered if international equities will continue to outperform the US in the next few years.
Let’s take a closer look.
An international overview
International equities represent nearly 40% of total global stock market capitalization. Broadly categorized into developed markets (e.g. Japan, UK, Germany, Australia) and emerging markets (e.g. China, India, Korea), international equities provide access to global industry leaders, regional economic growth drivers, and distinct market dynamics.
Developed markets are typically tilted toward sectors like financials, industrials, and healthcare. Emerging markets, by contrast, are more tech-heavy, with IT being the largest sector driven largely by semiconductor companies in Taiwan and South Korea. Financials come in second, and the rest like consumer discretionary and industrials trail behind.
The case for diversification
Investors tend to have recency bias and favor recent events or trends over historic ones. Due to the US’ outperformance since 2009, investors may be allocated overwhelmingly to US equities. However history has shown that market leadership tends to rotate over multi-year cycles.
A prime example is the US “Lost Decade” (2000–2007). Following the tech bubble crash of 2000 and the 2008–2009 global financial crisis, the S&P500 delivered a negative annualized return of -1.7%.
An investor who deployed 100% of his capital into a U.S. large-cap portfolio would have experienced a decade of zero net capital gains. In contrast, international markets thrived during this period with an annualized return of 6.1%.
For a short period back in the 1980s, the MSCI EAFE, which tracks large and mid-cap equities across 21 developed market countries excluding US and Canada, outperformed the MSCI US by almost 300% in just over six years. See table below.
This was driven primarily by an explosive economic boom in Japan, which grew to make up roughly 60% of the EAFE index. The Japan bubble eventually burst in 1990 and the EAFE lagged behind the US subsequently till today.
The JP Morgan chart below does a great job of visualizing the length of outperformance over time. The relative performance of indexes wax and wane, with the last 15 years being an incredible period of outperformance by US equities.
Why International Dividend Yields Are Higher
International indexes generally offer higher dividend yields of between 3.0% to 4.5%, compared to US indexes yielding around 1.2%–1.5%.
This is because international indexes lean more towards mature sectors such as financials, energy, utilities, and consumer staples. These capital-intensive, mature industries naturally distribute higher cash flow via dividends.
Whereas the US index e.g. S&P500, is highly focused on growth sectors like tech which allocate cash to drive sales, marketing and R&D. US companies also tend to prioritize share buybacks over dividends, which fellow writer Zee has comprehensively explained why the US doesn’t do dividends anymore.
Now let’s compare several International ETFs - dividend focused vs growth oriented, against the Vanguard S&P500 ETF (VOO).
Non-U.S. investors looking to avoid the standard 30% U.S. dividend withholding tax can look to UCITS ETFs domiciled in Ireland. Due to the US-Ireland Tax Treaty, Irish-domiciled UCITS ETFs pay a reduced 15% withholding tax on US dividends. For non-US holdings inside the ETF, localized tax treaties apply.
Do note that the expense ratio for UCITS ETFs are generally higher ~0.12% – 0.29% because of higher operational cost and smaller fund sizes.
Choosing an Accumulating (Acc) fund structure automatically reinvests dividends inside the fund, while Distributing (Dist) funds pay out yield directly.
Withholding tax still applies within an Accumulating fund structure, tax is deducted from dividends before being reinvested into the fund.
Is the US index expected to outperform International indexes?
S&P500 Growth Fundamentals
On fundamentals alone, there’s little sign of US exceptionalism fading. Return on equity has climbed back above 20%, EPS growth is running in the high teens, and revenue growth remains solidly positive, all pointing to a corporate sector that continues to compound earnings efficiently.
Dividend growth, while more modest at around 5.5%, reflects the S&P500’s structural preference for reinvestment and buybacks over payouts, not weakness in underlying cash generation. If anything, these metrics suggest the operational engine behind US outperformance is still intact.
S&P500 Valuation
Most recent point on each chart is a live estimate based on current price and latest reported earnings/sales. Data current as of Aug 2026.
Valuation seems to be the main driving force behind the outperformance of S&P500 compared to International indexes. It has continued to rise since 2013 and until recently were at, or near, their all-time highs.
This creates a tension: strong fundamentals argue the US deserves a premium, but a premium this large leaves less room for error and a smaller margin of safety if growth merely meets expectations rather than beats them.
Is International diversification worth it?
Overall this is not a question of “US or International”, but rather a question of balance. The S&P500’s fundamentals remain genuinely strong, and elevated valuations alone haven’t historically been a reliable timing signal; expensive markets can stay expensive for years, as we saw for most of the last decade.
But valuation does matter over longer horizons, and history shows that periods of extreme outperformance eventually mean-revert.
Keeping the bulk of the portfolio in a low-cost US index fund like VOO to stay invested in the fundamentals-driven growth story, while carving out a meaningful international portion, split between a broad ex-US growth ETF like VXUS and a dividend-focused option like SCHY or VYMI for the income tilt.
This isn’t a call that the International index will beat the US from here; nobody can know that with any confidence.
Disclaimer: All information here is for educational purposes only. This is not financial advice. Please do your own research and speak with a licensed advisor before making any investment decisions. Past performance is not indicative of future returns. How we invest may not suit your investment goals and risk management profile.