Geopolitical Drivers Behind DFAI and EWY's 2025 Surges: Assessing 2026 Sustainability

The story of international equities in 2025 was one of dramatic revaluation. While U.S. markets continued their long run, developed markets outside America delivered a surprise rally, catching up after years of lagging. This shift powered two standout performers. The Dimensional International Core Equity Market ETF (DFAI) gained 31% over the past year, a solid return for a fund built on disciplined factor tilts. But the real spectacle was the iShares MSCI South Korea ETF (EWY), which surged nearly 100% to become the top-performing international equity ETF of the year.

This wasn't just about two funds. It was a broad-based flight to international assets, fueled by a confluence of policy and economic forces. Record demand poured in, with international equity ETFs attracting $217 billion in inflows in 2025. That total was more than double the $100 billion-plus seen in 2024, a surge driven largely by a weaker U.S. dollar and a shift in investor sentiment that defied earlier "sell America" narratives. The geopolitical premium-investing in non-U.S. assets for diversification and growth-had become a powerful, if volatile, tailwind.

The core investment thesis for 2025's surge is clear. For DFAI, the catalyst was a broad-based recovery in developed markets, with its factor approach to smaller, value, and profitable companies capturing gains from European and Canadian strength. For EWY, the story was hyper-local: South Korea's export-driven economy, particularly its semiconductor sector, rode a wave of global tech demand and favorable trade flows. Both funds benefited from a global environment where U.S. policy shifts-like a weaker dollar policy and a recalibration of trade tensions-created a more level playing field for international competitors. The result was a year where international equities nearly doubled U.S. stock returns, and the ETF industry reaped the rewards.

Analyzing the Drivers: Factor Tilts vs. Geopolitical Tailwinds

The outperformance of these two funds stemmed from fundamentally different engines. DFAI's 31% gain was the result of a systematic, long-term investment strategy applied across a vast universe of stocks. The fund's disciplined factor tilt toward smaller-cap, value, and profitable companies was the core driver, capturing gains as developed markets outside the U.S. caught up. This approach, applied to over 3,800 securities, provided broad diversification that helped smooth volatility. However, this very diversification created a specific vulnerability: a heavy concentration in Canadian financials and energy firms, which now represents a significant sovereign risk exposure.

By contrast, EWY's near-100% surge was a direct, policy-driven event. The catalyst was a clear geopolitical shift. In November, the U.S. Commerce Department slashed tariffs on South Korean vehicles to 15% from 25%, a move that was retroactive and signaled a thaw in trade tensions. This wasn't a gradual market recovery; it was a sudden, material reduction in a major trade friction that directly benefits South Korea's export-heavy economy. The U.S. decision created a clear geopolitical premium for a key ally, instantly boosting investor confidence and capital flows into the country's equities.

The implications of these two drivers are stark. DFAI's factor-based approach is a bet on market efficiency and long-term value. It offers resilience through diversification but leaves it exposed to the fortunes of a single, resource-dependent economy. EWY's performance, however, was a pure play on a specific U.S. policy reversal. Its explosive growth was a direct reward for South Korea's strategic alignment with Washington, demonstrating how trade policy can act as a powerful, immediate tailwind for a nation's financial markets. For investors, the choice is between a systematic, long-term tilt and a geopolitical event play.

The 2026 Outlook: Scenarios, Catalysts, and Regulatory Headwinds

The explosive gains of 2025 have set a high bar. For both DFAI and EWY, the sustainability of their momentum now depends on a volatile mix of geopolitical alignments, policy durability, and economic resilience. The catalysts for continuation are clear, but so are the headwinds that could quickly reverse the trend.

For DFAI, the primary driver is a continuation of the macro environment that fueled its 31% rally. This means sustained U.S. dollar weakness, which makes foreign assets cheaper for American investors, and a stable global trade policy landscape that allows developed markets to compete on a level playing field. The fund's broad diversification is a strength, but it also concentrates its risk in a single, resource-dependent economy. Its heavy exposure to Canadian financials and energy firms represents a significant sovereign risk. Any geopolitical instability in Canada or a sharp drop in commodity prices could disproportionately pressure the fund, even if global markets remain stable. Investors must monitor this concentration closely, as it could become a vulnerability if the geopolitical premium for international assets fades.

EWY's outlook is far more binary and hinges entirely on the durability of a single policy shift. The fund's near-100% surge was a direct reward for the U.S. decision to slash South Korean auto tariffs. The primary catalyst for 2026 is the maintenance of this improved trade relationship. Any broadening of tariffs to other South Korean goods, the imposition of new restrictions, or a reversal of the current diplomatic thaw would be a major headwind. The U.S. has signaled a strategic alignment with Seoul, but that alignment is not guaranteed to persist through future administrations or shifting trade priorities. For EWY, the geopolitical premium is now fully priced in; the fund's performance will be a pure play on the stability of this bilateral deal.

Beyond these specific catalysts, investors should watch for central bank policy divergence, particularly in Europe. The region appears poised for strong growth in 2026, supported by interest rate cuts and fiscal stimulus. If European central banks act more aggressively than the U.S. Federal Reserve, it could further weaken the dollar and support international equities broadly, benefiting DFAI. However, if the Fed maintains a hawkish stance while Europe cuts, it could pressure the dollar and create volatility. More broadly, the resilience of corporate earnings in key developed markets will determine whether the 2025 rally was a sustainable revaluation or a speculative peak. Record inflows into international ETFs have created a crowded trade; any earnings disappointment could trigger a sharp reversal.

The bottom line is that 2026 will be a year of testing. DFAI's factor-driven approach offers a long-term framework, but its concentrated sovereign risk makes it sensitive to geopolitical shocks. EWY's explosive growth was a geopolitical event play; its future depends on the longevity of that specific policy tailwind. For both, the initial surge has been powered by external forces. Sustaining it will require those forces to remain favorable, a condition that is far from certain.