How to Invest in International ETFs
Last updated: March 2026
Expand your portfolio beyond US borders with international ETFs. Learn why global diversification matters, which funds to consider, and how to handle currency risk and foreign taxes.
Step 1: Understand Why International Investing Matters
The US stock market represents about sixty percent of global market capitalization, which means forty percent of the world's investable stocks are outside the US. By only holding US stocks, you miss out on growth from economies in Europe, Asia, and emerging markets. International diversification also reduces your portfolio's dependence on a single country's economy, politics, and currency. There have been extended periods lasting a decade or more when international stocks outperformed US stocks. Holding both ensures you participate in global growth wherever it occurs rather than betting everything on one country continuing to outperform indefinitely.
Step 2: Learn the Categories of International ETFs
International ETFs are generally divided into three categories. Developed international markets include countries like the United Kingdom, Germany, Japan, Australia, and Canada. These are economically mature with stable financial systems. Emerging markets include countries like China, India, Brazil, Taiwan, and South Korea. These offer higher growth potential but with greater volatility and political risk. Frontier markets are the smallest and least developed, including countries like Vietnam, Nigeria, and Bangladesh. Most investors focus on developed and emerging markets. A total international ETF like VXUS combines both developed and emerging markets in a single fund, which is the simplest approach.
Step 3: Choose Your International ETFs
The simplest approach is a single total international ETF. VXUS from Vanguard covers over seven thousand stocks across both developed and emerging markets with an expense ratio of 0.07 percent. IXUS from iShares is a comparable alternative. If you want more control, you can split your international allocation between a developed markets ETF like VEA or IEFA and an emerging markets ETF like VWO or IEMG. A common split is seventy-five percent developed and twenty-five percent emerging within your international allocation. For most investors, the single total international fund approach is sufficient and avoids the need to rebalance between two international sub-categories.
Step 4: Decide How Much to Allocate Internationally
Financial theory suggests holding international stocks in proportion to their share of global market capitalization, which would mean roughly forty percent of your stock allocation. In practice, most US investors allocate between twenty and forty percent of their stock allocation to international markets. A common recommendation is thirty percent international and seventy percent US for a balanced approach. Some investors prefer a heavier US allocation due to the historical strength of US markets and the simplicity of a home-country focus. The exact percentage matters less than having at least some international exposure. Even twenty percent international provides meaningful diversification benefits.
Step 5: Understand Currency Risk
When you invest in international ETFs, you are indirectly exposed to foreign currency movements. If the US dollar strengthens against foreign currencies, the dollar value of your international holdings decreases even if foreign stock prices are unchanged. Conversely, a weakening dollar boosts your international returns. Over very long periods, currency effects tend to wash out. For most long-term buy-and-hold investors, currency-hedged ETFs are unnecessary because the added expense of hedging reduces returns over time without improving outcomes. Accept currency risk as a natural part of international investing. It actually provides an additional source of diversification because currency movements are largely independent of stock market movements.
Step 6: Know the Tax Implications
International ETFs have unique tax considerations. Foreign governments withhold taxes on dividends paid by companies in their countries, typically at rates of ten to thirty percent. Your international ETF's dividends reflect this withholding. However, US taxpayers can claim a foreign tax credit on their tax return to offset this double taxation. This credit is more valuable in a taxable brokerage account. In a tax-advantaged account like an IRA, you cannot claim the foreign tax credit, which means the withholding is a permanent cost. For this reason, some investors prefer to hold international ETFs in taxable accounts where the foreign tax credit provides a tax benefit.
Pro Tips
- ✓Start with a single total international ETF like VXUS for simplicity before adding separate developed and emerging market funds.
- ✓Hold international ETFs in a taxable account when possible to take advantage of the foreign tax credit on your US tax return.
- ✓Do not try to time international versus US allocation based on recent performance. Stick with a fixed percentage and rebalance annually.
- ✓Remember that many large US companies like Apple and Microsoft already earn significant revenue internationally, providing indirect global exposure.
Common Mistakes to Avoid
- ✗Avoiding international stocks entirely because US stocks have outperformed recently, ignoring that leadership between US and international markets rotates over decades.
- ✗Paying extra for currency-hedged international ETFs when long-term investors do not benefit from hedging and it adds ongoing costs.
- ✗Holding international ETFs exclusively in an IRA where you cannot reclaim foreign tax withholding through the foreign tax credit.
- ✗Allocating too heavily to emerging markets based on growth expectations without accounting for the higher volatility and political risk involved.
Recommended: This beginner-friendly ETF course on Udemy covers everything from ETF fundamentals to building a recession-proof portfolio in 7 days.
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