The 2025 Dilemma: Is Broad International Exposure via VXUS Still a Smart Move for U.S. Investors?

In 2025, the Vanguard Total International Stock ETF (VXUS) has emerged as a standout performer, returning 18.95% year-to-date and surpassing $100 billion in assets under management [2]. For U.S. investors seeking to diversify beyond domestic markets, VXUS offers broad exposure to 8,500 international stocks across 47 countries, including significant allocations to Japan, the U.K., and China [2]. Yet, as geopolitical tensions, currency fluctuations, and structural shifts in global trade reshape the investment landscape, the question remains: Is VXUS still a smart bet for U.S. investors?

The Case for VXUS: Diversification and Valuation Advantages

VXUS’s appeal lies in its low-cost access to global equities and its ability to hedge against U.S. market concentration. With a 0.05% expense ratio and a Sharpe Ratio of 0.99 (outperforming the S&P 500’s 0.85 as of August 2025), the fund has delivered strong risk-adjusted returns [2]. Analysts project that developed non-U.S. stocks could outperform U.S. markets by 1.4% annually over the next decade, driven by lower valuations and stronger dividend yields [5]. In 2025, the weakening U.S. dollar (down 9% year-to-date) has amplified VXUS’s returns, as foreign earnings convert to more dollars [4]. For example, a $1,000 investment in VXUS since 2015 would have grown to $2,070 with reinvested dividends, outpacing the S&P 500’s $3,875 [1].

However, this performance is not without caveats. The fund’s lack of currency hedging exposes it to dollar volatility. During periods of dollar strength, such as 2022–2023, VXUS underperformed its hedged counterparts by ~0.5% annually [1]. While the current dollar decline has been a tailwind, a reversal could erode gains.

Geopolitical Risks and the Cost of Diversification

The 2025 geopolitical landscape is fraught with challenges. U.S.-China tensions, Middle East conflicts, and rising protectionism have introduced volatility into international markets. For instance, China’s military drills near Taiwan and U.S. tariffs on Chinese goods have disrupted trade flows, while cyberattacks and AI-driven technological decoupling threaten global supply chains [5]. These risks disproportionately affect emerging markets, which comprise ~25% of VXUS’s holdings [2].

Moreover, VXUS’s “extreme diversification” may dilute returns for investors seeking targeted exposure. A $1,000 investment in VXUS since 2015 grew to $1,540, lagging behind the S&P 500’s $3,263 [1]. While broad diversification reduces home-country bias, it also includes underperforming markets that may not align with individual strategies.

The Hedging Debate: Stability vs. Opportunity

The decision to hedge currency risk is a critical trade-off. Hedged international ETFs like the iShares Currency Hedged MSCI EAFE ETF (HEFA) have historically delivered lower volatility and better returns during dollar strength. For example, over the trailing 10 years through 2024, HEFA returned 8.9% annually versus VXUS’s 5.1% [1]. However, hedging comes at a cost: higher expense ratios and potential tax inefficiencies from rolling forward contracts [1]. In 2025’s dollar-weak environment, unhedged strategies like VXUS have outperformed, but this dynamic could reverse if the dollar rebounds.

Conclusion: A Strategic, Not a Reflexive, Move

VXUS remains a compelling option for U.S. investors seeking global diversification, particularly in a weak-dollar environment. Its low cost, broad coverage, and strong risk-adjusted returns make it a cornerstone for reducing home-country bias. However, the fund’s currency exposure and geopolitical vulnerabilities require careful consideration. For investors with a long-term horizon and a tolerance for volatility, VXUS can complement a U.S.-centric portfolio. But for those prioritizing stability or seeking to capitalize on specific regions, hedged strategies or more focused ETFs may offer better alignment.

In 2025, the key is balance: leveraging VXUS’s diversification benefits while mitigating its trade-offs through strategic hedging or sector-specific allocations. As global markets evolve, so too must the approach to international exposure.

Source:
[1] If You'd Invested $1000 in the Vanguard Total International Stock Index Fund ETF [https://www.mitrade.com/insights/news/live-news/article-8-1089812-20250903]
[2] VXUS: Mutual Fund Forecast, Risk & 2025 Outlook [https://diversification.com/etfs/VXUS]
[3] Revisiting currency risk and hedging | iShares - BlackRock [https://www.blackrock.com/au/insights/ishares/revisiting-currency-risk-in-2025]
[4] VXUS outperformed S&P 500 in 2025 [https://www.facebook.com/groups/sensible.investing/posts/1761505648058181/]
[5] Geopolitical Risk Dashboard | BlackRock Investment Institute [https://www.blackrock.com/corporate/insights/blackrock-investment-institute/interactive-charts/geopolitical-risk-dashboard]