Investors these days might be riding the highs of a strong, prolonged U.S. bull market, but it hasn't always been smooth sailing.
Older investors might recall the period from 1999 to 2009, now often called the "lost decade" for U.S. equities, when the U.S. stock market posted a meager compound annual growth rate of 1.7%.
This period saw three years of losses due to the dot-com bubble's burst, followed by a slow recovery that was knocked back down by the 2008 financial crisis.
Not all markets suffered like the U.S. did during this time. For example, international developed markets – which include countries like Japan, Germany, France, Australia and the U.K. – yielded a more robust 4.1% annualized return.
Even more impressive were the emerging markets like China, India, Brazil, Russia and South Africa, which delivered a stellar annualized return of 13.7%.
"In particular, emerging markets are projected to become the major driver of global growth in the next several years," says Kevin T. Carter, founder and chief investment officer at EMQQ Global. "As these economies expand, we expect their internet and technology sectors to see outsized gains as already witnessed in many western markets.”
The takeaway is clear: International diversification is key. Enduring a decade of flat returns is a tough pill to swallow for any investor, so having stocks from outside the U.S. can help buffer against potential stagnation and potentially reap above-average returns.
"Adding international stocks to your portfolio can dampen volatility and improve returns, since the U.S. economy and market may face challenges at different times compared to international regions," says Scott Klimo, chief investment officer at Saturna Capital. "Mitigating currency risk also plays a role, as the U.S. dollar may strengthen or weaken versus other countries at different times."
Fortunately, accessing international markets is easier and more affordable than ever with mutual funds and exchange-traded funds (ETFs), both of which offer a straightforward alternative to dealing with American depositary receipts (ADRs) or currency conversions.
Here are seven of the best international stock funds to buy in 2024:
| Fund | Expense ratio |
| Fidelity International Index Fund (ticker: FSPSX) | 0.04% |
| Vanguard Total International Stock ETF (VXUS) | 0.08% |
| iShares Core MSCI EAFE ETF (IEFA) | 0.07% |
| iShares Core MSCI Emerging Markets ETF (IEMG) | 0.09% |
| Schwab Fundamental International Small Company Index Fund (SFILX) | 0.39% |
| KraneShares CSI China Internet ETF (KWEB) | 0.69% |
| Emerging Markets Internet & Ecommerce ETF (EMQQ) | 0.86% |
Fidelity International Index Fund (FSPSX)
"The ex-U.S. market makes up about 40% to 45% of the world's market capitalization, so by ignoring international stocks, investors are missing out on roughly half the world's investing opportunities," says Kirk Kinder, founder and president of Picket Fence Financial. "Moreover, international stocks are substantially undervalued when you look at metrics like price-to-earnings and price-to-book ratios."
One of the easiest ways to quickly access international developed stocks is via FSPSX, which has a track record dating back to November 1997. This ETF tracks the MSCI Europe, Australasia and Far East (EAFE) Index. Fidelity offers this fund at a low 0.035% expense ratio with no minimum required investment. It is also tax efficient, with a low 3% portfolio turnover rate.
Vanguard Total International Stock ETF (VXUS)
Investors who prefer the liquidity and intraday trading of an ETF may prefer VXUS over a mutual fund. This ETF tracks both developed and emerging markets via the FTSE Global All Cap ex U.S. Index. Currently, VXUS' portfolio spans more than 8,600 international equities weighted by market capitalization. Thanks to its passive indexing approach, the ETF also keeps turnover minimal at 3.9%, which improves tax efficiency.
VXUS is market-cap-weighted, so regions with larger stock markets will be featured more. Accordingly, only around 25% of the ETF is composed of emerging market equities. The remaining 75% are split among various developed markets, with Japan, the U.K. and Canada leading in terms of overall weight. As for fees, the ETF charges a 0.08% expense ratio.
iShares Core MSCI EAFE ETF (IEFA)
Investors looking to focus solely on developed markets can use IEFA as an ETF alternative to FSPSX. This ETF tracks the similar MSCI EAFE IMI Index. "IMI" in this case stands for "investable market index," meaning that unlike the MSCI EAFE Index, it also holds small- and mid-cap stocks. By using this index, IEFA delivers broader diversification across 2,800 equities while still maintaining a similar risk and return.
This ETF is currently one of the largest in the iShares lineup, with more than $117 billion in assets under management, or AUM. It is also easy to trade, with a 30-day median bid-ask spread of just 0.01%. Notable top holdings in IEFA you may recognize include Nestle SA (NESN.SW), LVMH Moet Hennessy – Louis Vuitton, SE (MC.PA), Toyota Motor Corp. (7203.T), AstraZeneca PLC (AZN) and Shell PLC (SHEL). IEFA charges a 0.07% expense ratio.
iShares Core MSCI Emerging Markets ETF (IEMG)
IEFA's emerging markets counterpart is IEMG. This ETF is a part of iShares' "core" ETF lineup, which is designed to provide investors with low-cost, broadly diversified portfolio building blocks. Currently, it tracks the MSCI Emerging Markets IMI Net Index, which features more than 2,900 market-cap-weighted holdings at a 0.09% expense ratio. It is also very popular, with more than $79 billion in AUM.
In terms of geographic diversification, the top five countries represented in IEMG are China, India, Taiwan, South Korea and Brazil. Notable foreign companies U.S. investors may recognize include Taiwan Semiconductor Manufacturing Co. Ltd. (2330.TW), Tencent Holdings Ltd. (0700.HK), Samsung Electronics Ltd. (005930.KS) and Alibaba Group Holding Ltd. (9988.HK).
Schwab Fundamental International Small Company Index Fund (SFILX)
International investors looking to potentially outperform market-cap-weighted indexes may be interested in SFILX. This fund tracks the Russell RAFI Developed ex U.S. Small Company Index, which selects and weights holdings based on fundamental factors. This includes selecting stocks that fall in the bottom 30% based on size, and screening for low valuations based on various price ratios and high dividend yields.
Compared to market-cap-weighted index funds, fundamental index funds tend to have higher expense ratios, with SFILX charging 0.39%. However, some can outperform – over the trailing 15 years, SFILX has returned an annualized 8.3% versus 7.2% for the MSCI EAFE Index. Of course, outperformance is not guaranteed for the future, so investors should not place too much emphasis on this.
KraneShares CSI China Internet ETF (KWEB)
"There is a strong case for China entering a technical bull market – Chinese internet tech stocks are up almost 24% over the past three months, outperforming the S&P 500 and Nasdaq Composite, which were flat or down over the same period," says Brendan Ahern, chief investment officer at KraneShares. For exposure to this slice of China's market, KraneShares offers KWEB at a 0.69% expense ratio.
The top holdings in KWEB currently include Tencent, Alibaba and Meituan (3690.HK). Overall, it tilts strongly toward the technology, communications and consumer discretionary sectors, which tend to be more cyclical.
A group of economists surveyed by Nikkei in March forecasted China's GDP to grow 4.7% on average in 2024, though the nation's economy has outrun that number so far this year.
"We also see China's economy slowly rebounding," Ahern says. "Not one of the 30 economists predicted China’s GDP would grow 5.3% in Q1 2024 – they were skeptical!"
Emerging Markets Internet & Ecommerce ETF (EMQQ)
"EMQQ focuses on some of the most innovative and fastest-growing companies in emerging markets," Carter says. "The theme is underpinned by rising digitalization and internet consumption from a wide range of countries spanning China, India, Brazil and even Mexico." This unique ETF therefore allows investors to bet on this potential growth without being locked to a specific sector.
"In many of these markets, smartphone and e-commerce penetration are at much lower levels than developed markets, providing a multi-decade tailwind of growth," Carter says. For investors, this dynamic could be akin to going back in time and investing in companies like Amazon.com Inc. (AMZN) before they grew big, albeit in a different country. EMQQ charges a 0.86% expense ratio.
