If you are a regular reader or follower of our team’s content, you likely know that we’ve spent a great deal of time over the past year and a half discussing not only the benefits of investing in overseas markets and the importance of diversification in portfolios today, but also our view that there are compelling opportunities to generate strong risk-adjusted returns internationally, specifically in international equities.
Not surprisingly, we have encountered some pushback. As Ryan has noted for some time, we have been in a secular bull market for most of the last decade and a half, led primarily by US equities, particularly large-cap stocks. If you owned international equities instead of, or even alongside, US large caps over that period, you’ve likely spent considerable time and angst, questioning the allocation and wondering why you did not simply concentrate in US markets. Until recently, that skepticism was understandable.
For years, the prevailing narrative has been that international markets are “cheap” and that mean reversion would inevitably lead to outperformance. We have pushed back on that idea, emphasizing that valuations alone are not a sufficient impetus for purchase. Rather, they represent an opportunity that must coincide with a meaningful catalyst to drive that change. For a long time, international markets simply lacked that catalyst.
That, in our eyes, began to shift last year. We began to see meaningful policy changes in Europe, not the least of which was the easing of Germany’s debt brake and a significant commitment, roughly one trillion dollars, toward infrastructure and defense spending over the next ten years. More broadly across Europe, there has been growing willingness to provide further fiscal support, not only for defense spending but more broadly. These developments provided the type of catalyst we had been looking for, and markets responded accordingly. European equities finished the year up 35.77% (proxied by SPEU), significantly outpacing US returns of 17.8% (proxied by SPYM). Year to date, performance has been more in line, but we believe the opportunity across international markets is still early.
As we have discussed these views with advisors, clients, and anyone else who honors us with their audience, we expected some skepticism. After all, discussing Polish industrials is not always the most exciting conversation in the age of AI, humanoid robots, and space exploration. What we did not expect, however, were several persistent misconceptions around international investing.
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The first is general hesitation driven by concerns about smaller-cap exposure. Some believe international investing requires moving down the market cap spectrum. While that can be true depending on the vehicle, in practice, broad international exposure does not necessarily mean a smaller-cap tilt.
For example, using SPYM as a proxy for US equities and widely used ETFs such as EEM for emerging markets and IDEV for international developed markets (both tracking MSCI indices), the results may be counterintuitive. While one might assume emerging markets would skew smaller, many of these indices apply size screens that result in meaningful exposure to large and mega-cap companies. In fact, allocating to emerging markets can increase a portfolio’s exposure to “giant” cap stocks, while developed international exposure may only marginally increase small cap exposure.
Source: Carson Investment Research, YCharts 9/8/26
In other words, investing internationally does not inherently require making a corresponding size bet.
With the proliferation of ETFs that frankly can and do anything at this point, you can absolutely find any number of products that morph your cap exposure as you go international, but it doesn’t have to.
The second misconception we encountered relates to technology exposure. Many investors remain highly focused on technology and believe it will continue to drive outsized returns over the next decade or more, just as it has for many years past. We largely agree with that view, but disagree with the framing that coincides with this view being that to invest in technology and innovation means one must own only US stocks.
This, I would argue, is only half (or maybe like 2/5) right. If you invest in a market-cap-weighted developed international ETF like IDEV, you will see a meaningful shift in sector composition. Developed international markets tend to have greater exposure to cyclical sectors such as financials, industrials, and materials, resulting in a higher value tilt and less exposure to growth, specifically technology and, subjectively, innovation more broadly. That is not necessarily an outright negative, but it is a notable difference.
Emerging markets, however, tell a different story. Using EEM as a proxy, emerging markets actually have comparable exposure to technology to the S&P 500. This may be more intuitive today given the prominence of companies such as Taiwan Semiconductor, Tencent, and Alibaba in the long-lasting AI craze, or more recently companies such as Samsung and SK Hynix that have had a meteoric rise courtesy of the switch to a focus, and bottleneck, or the need for memory in the AI buildout. The key takeaway is that gaining exposure to innovation, artificial intelligence, and broader technological advancement does not require a US-only approach. In fact, a globally diversified allocation can provide more comprehensive exposure to these themes.
Source: Carson Investment Research, YCharts 5/4/26
This is not to suggest that investors should blindly increase international exposure or overweight it relative to the US. Rather, for those who are underweight or not currently allocated, it is worth considering the role international equities can play. They provide diversification across regions, access to different industries and leaders, and exposure to distinct economic drivers.
All this is to say the international opportunity set is not necessarily better or worse than in the US, but simply different. In our view, that difference is complementary and can play an important role in constructing a well-diversified, global multi-asset portfolio.
By Shane Denton, Sr. Analyst, Investment Research
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