The Global Rebalancing: How International Equity ETFs Are Reshaping Investor Sentiment Amid U.S. Outflows

In the third quarter of 2025, a striking shift in global investor behavior emerged: international equity ETFs attracted a staggering $270 billion in inflows, while U.S. large-cap benchmarks faced persistent outflows. This divergence, driven by a confluence of macroeconomic forces and evolving investor preferences, signals a broader reallocation of capital away from U.S.-centric portfolios toward a more diversified global landscape. The implications for long-term asset allocation and diversification strategies are profound.

The Data: A Tale of Two Markets

International equity ETFs, led by the FTSE Global All Cap ex US Index, delivered a 32% return in 2025, outperforming the S&P 500's 18% by the widest margin in over two decades. This performance, coupled with a U.S. dollar that fell more than 9% for the year, made overseas markets increasingly attractive. European investors, in particular, played a pivotal role, with Ireland alone contributing $55 billion in inflows to equity funds.

Meanwhile, U.S. large-cap benchmarks, though posting robust returns (the S&P 500 gained 8.11% in Q3), faced a paradox. Passive ETFs like the Vanguard S&P 500 ETF (VOO) and iShares Core S&P 500 ETF (IVV) saw record inflows—$143 billion and $78 billion, respectively—yet active U.S. equity funds hemorrhaged $386 billion in 2025. This split reflects a growing preference for low-cost passive strategies and a skepticism toward active management, especially in a market dominated by a handful of mega-cap tech stocks.

Drivers of the Shift

Three key factors underpin this reallocation:

1. U.S. Dollar Weakness: A weaker dollar amplified the returns of international equities for U.S. investors, effectively acting as a tailwind. Non-dollar investors, meanwhile, reduced exposure to U.S. assets, reallocating to local markets where valuations appeared more attractive.
2. Yield-Seeking Behavior: As central banks cut rates and yields on short-term instruments dwindled, investors turned to international markets and alternative assets. High-yield corporate bonds, inflation-linked bonds, and emerging market equities saw record inflows, with gold ETFs alone attracting $6.3 billion in December 2025.
3. Re-Rating of Foreign Markets: For years, U.S. equities were seen as a safe haven amid global uncertainty. But as growth in Europe and Asia stabilized, and valuations in U.S. tech stocks stretched, investors began to re-rate international markets. The Mag 7's dominance in the S&P 500, while impressive, also highlighted the concentration risk in U.S. large-cap benchmarks.

Implications for Long-Term Strategies

This shift challenges the conventional wisdom that U.S. equities are the default core of global portfolios. Diversification is no longer a luxury—it is a necessity. Investors must now weigh the risks of overexposure to a single market, even one as dominant as the U.S.

For long-term asset allocation, the lesson is clear: balance is key. While U.S. large-cap ETFs remain a cornerstone for their liquidity and growth potential, international equities offer both diversification and the potential for higher returns in a multi-speed global economy. Passive strategies, particularly in international markets, are likely to outperform active ones, given the structural advantages of low costs and broad exposure.

Investment Advice: Embrace the Global Rebalancing

For investors, the takeaway is twofold. First, rebalance portfolios to include a meaningful allocation to international equities, particularly in regions with strong growth fundamentals and undervalued markets. Second, favor passive ETFs over active strategies in both U.S. and international markets, where the cost and performance advantages are increasingly hard to ignore.

However, caution is warranted. The shift to international markets is not without risks—geopolitical tensions, currency volatility, and divergent regulatory environments remain challenges. Investors should also consider hedging currency exposure and tilting toward sectors with global growth potential, such as AI-driven infrastructure or renewable energy.

In the end, the 2025 rebalancing reflects a maturing investor base that is no longer seduced by the allure of U.S. tech dominance. As global markets continue to evolve, those who adapt their strategies to embrace this new reality will be best positioned to navigate the uncertainties ahead.