International assets are a crucial part of any well-diversified investment portfolio. Here we’ll look at the best international ETFs for 2021 for both stocks and bonds across developed and emerging markets.
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Contents
Introduction – Why International Stocks and Bonds?
International stocks inarguably offer a diversification benefit to a diversified investment portfolio by not being perfectly correlated to the U.S. market, thereby lowering portfolio volatility and risk. That is, international stocks do not move in perfect lockstep with U.S. stocks.
At their global market weight, U.S. stocks comprise only about 50% of the global stock market. Top target date funds now allocate over 30% of equities positions to ex-US stocks. Moreover, considering the historical performance of emerging markets, excluding international stocks may mean missing out on great investment opportunities. Also consider that international markets contain most of the largest automotive, telecommunication, and electronics companies.
No single country consistently outperforms all the others in the world. If one did, that outperformance would also lead to relative overvaluation and a subsequent reversal. Meb Faber found that if you look at the past 70 years, the U.S. stock market has outperformed foreign stocks by 1% per year, but all of that outperformance has come after 2009.
During the period 1970 to 2008, an equity portfolio of 80% U.S. stocks and 20% international stocks had higher general and risk-adjusted returns than a 100% U.S. stock portfolio. Specifically, international stocks outperformed the U.S. in the years 1986-1988, 1993, 1999, 2002-2007, 2012, and 2017.
In short, geographic diversification in equities has huge potential upside and little downside for investors.
Similarly, the evidence seems to show that international bonds may offer a small diversification benefit in terms of credit risk on the fixed income side due to their low correlation with both U.S. stocks and U.S. bonds.
Below we’ll check out some of the best international ETFs across both stocks and bonds to reduce portfolio risk alongside U.S. assets.
The 9 Best International ETFs
Below are the 9 best international ETFs, segmented by asset type.
Best International Stock ETFs
Here we’ll look at the best international stock ETFs:
VXUS – Vanguard Total International Stock ETF
Vanguard international ETFs offer some of the cheapest exposure to ex-US assets. The Vanguard Total International Stock ETF (VXUS) is the most popular broad international stock ETF, and for good reason. The fund has a very low expense ratio for this space at only 0.08%, providing affordable access to the total international stock market. This ETF seeks to track the FTSE Global All Cap ex US Index and has over $420 billion in assets under management.
VEU – Vanguard FTSE All-World ex-US ETF
Similar to VXUS above is the Vanguard FTSE All-World ex-US ETF (VEU). The fund seeks to track the FTSE All-World ex US Index and also has an expense ratio of 0.08%. Both VEU and VXUS are highly liquid, broad international stock ETFs. Their performance has been nearly identical historically. VXUS is arguably more diversified with roughly 7,500 holdings compared to 3,500 for VEU.
IXUS – iShares Core MSCI Total International Stock ETF
The iShares Core MSCI Total International Stock ETF (IXUS) is another broadly diversified international stock ETF. The fund seeks to track the MSCI ACWI ex USA IMI Index and has over $20 billion assets and 4,300 holdings. This ETF is slightly more expensive than the above two with an expense ratio of 0.09%.
VEA – Vanguard FTSE Developed Markets ETF
Investors seeking to only invest in Developed Markets will enjoy the Vanguard FTSE Developed Markets ETF (VEA). This fund seeks to track the FTSE Developed All Cap ex US Index. It has over $120 billion in assets, over 4,010 holdings, and an expense ratio of only 0.05%.
VWO – Vanguard FTSE Emerging Markets ETF
VWO provides exposure to Emerging Markets via the FTSE Emerging Markets All Cap China A Inclusion Index. As you can see from the index name, VWO includes China and other developing countries like Taiwan, India, Brazil, etc. VWO has a fee of 0.10%.
VWO may be the most important fund on this list. Developed Markets (VEA above, and most of VXUS) are highly correlated with the U.S. market and thus don’t offer as much of a diversification benefit. Emerging Markets are a superior diversifier and have also conveniently paid a significant risk premium historically. I purposely overweight Emerging Markets in my own portfolio for these reasons.
Emerging Markets comprise about 11% of the global stock market. Note that Emerging Markets as a whole are more volatile than Developed Markets. VXUS (total ex-US stock market) is roughly a 3:1 ratio of Developed Markets to Emerging Markets.
Best International Bond ETFs
Below we’ll check out a few of the best international bond ETFs.
BNDX – Vanguard Total International Bond ETF
The Vanguard Total International Bond ETF (BNDX) provides broad, USD-hedged diversification across the entire foreign bond market. The fund has over $150 billion in assets, an average maturity of about 10 years, and an expense ratio of 0.08%. This ETF seeks to track the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged).
IAGG – iShares Core International Aggregate Bond ETF
The iShares Core International Aggregate Bond ETF (IAGG) is a broad international bond ETF from iShares. The fund seeks to track the Bloomberg Barclays Global Aggregate ex USD 10% Issuer Capped (Hedged) Index. This ETF is roughly equivalent to BNDX but with a slightly shorter duration and average maturity. The expense ratio for this ETF is 0.09%.
IGOV – iShares International Treasury Bond ETF
Those seeking exposure to only foreign treasury bonds will appreciate the iShares International Treasury Bond ETF (IGOV). The fund tracks the FTSE World Government Bond Index and has an expense ratio of 0.35%. Its average maturity is about 11 years.
VWOB – Vanguard Emerging Markets Government Bond ETF
VWOB provides access to USD-denominated government bonds in Emerging Markets. This exposure may benefit investors who hold only U.S. bonds, as bonds from Emerging Markets are lowly correlated to U.S. bonds, and diversifies the investor’s credit risk. This diversification comes at a cost; VWOB has a fee of 0.25%.
VWOB seeks to track the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index.
Where To Buy These International ETFs
All the above international ETFs are available at M1 Finance. M1 has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, intuitive pie visualization, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here. Investors outside the U.S. can find these ETFs on eToro.
Disclosures: I am long VWO and VEA.
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Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
Typo: VGIT made it into IXUS! Masquerading as an international stock ETF!
Oops. Not sure where my brain was. Thanks! Fixed.