The Global Rebalancing: How VXUS's $100 Billion Milestone Signals a New Era of Equity Diversification

In the ever-shifting landscape of global finance, milestones often serve as barometers for deeper currents of change. The recent crossing of the $100 billion threshold by the Vanguard Total International Stock ETF (VXUS) is one such moment. This fund, which tracks the FTSE Global All Cap ex US Index, has not only captured the imagination of investors but also reflected a strategic recalibration in how capital is deployed across borders. The surge in VXUS's assets under management—$27.33 billion added in the past 12 months alone—speaks to a broader rethinking of the role of U.S. equities in a diversified portfolio and the growing conviction that non-U.S. markets can deliver both stability and growth.

The Case for International Equities: Beyond the U.S. Premium

For much of the 2010s and early 2020s, U.S. equities, particularly the S&P 500, enjoyed a near-mythical status. The dominance of a handful of technology giants—Meta, Apple, Alphabet, Amazon, Microsoft, and NVIDIA—turned the U.S. market into a one-trick pony, albeit a very lucrative one. Yet this concentration came at a cost. By 2024, the S&P 500 had become a proxy for a narrow slice of the economy, with seven companies accounting for nearly a third of the index's performance. When these stocks faltered—whether due to regulatory scrutiny, valuation corrections, or sector-specific volatility—the entire market felt the tremors.

Enter the international story. As of July 2025, the MSCI ACWI ex USA Index trades at a 35% discount to the S&P 500. This valuation gap, while not a guarantee of future returns, creates a margin of safety for investors willing to take a longer-term view. J.P. Morgan's capital market assumptions project that developed international equities could outperform U.S. markets by 1.4 percentage points annually over the next decade. The logic is compelling: lower valuations, higher dividend yields, and a more balanced earnings mix across sectors and geographies.

The Forces Driving the Shift

The pivot to international equities is not merely a reaction to U.S. market fragility but a response to structural shifts in the global economy. Consider the following:

1. Decentralization of Innovation: While U.S. tech firms have long been the darlings of global innovation, the rise of AI in China—led by companies like Deepseek, Alibaba, and Tencent—has begun to challenge the narrative. These firms, operating under constraints such as U.S. semiconductor sanctions, have found ways to innovate within limits, proving that the U.S. is no longer the sole engine of technological progress.

2. Fiscal Policy Divergence: As U.S. fiscal stimulus under the Inflation Reduction Act winds down, Europe and Asia are stepping into the breach. Germany's $546 billion infrastructure fund and expanded defense spending, for instance, are creating a tailwind for European defense contractors and construction firms. Meanwhile, Japan's corporate governance reforms—mandating higher dividends and buybacks—have already boosted shareholder returns, with South Korea poised to follow suit.

3. Tariff Uncertainty and Supply-Chain Resilience: New U.S. tariffs on imports are forcing companies to rethink global supply chains. Firms with operations outside the U.S. are better positioned to navigate this uncertainty, offering a competitive edge to non-U.S. equities.

4. Currency Dynamics: A weaker U.S. dollar has made international stocks more attractive to U.S. investors, as earnings from overseas companies translate into more dollars when repatriated. This effect, combined with the diversification benefits of holding assets in multiple currencies, has amplified the appeal of funds like VXUS.

The Investment Implications

For investors, the VXUS milestone is not just a headline—it's a signal to reassess portfolio allocations. A 25% to 30% allocation to developed non-U.S. equities, as recommended by many institutional investors, can significantly reduce reliance on the U.S. market while capturing growth in regions like Europe and Asia. This approach is particularly attractive in a world where geopolitical stability is improving in Europe post-Brexit and where demographic trends in Asia are driving long-term demand for healthcare and consumer goods.

However, the path is not without risks. Political volatility in emerging markets, regulatory shifts in Europe, and the potential for a global economic slowdown could temper returns. Yet, for those willing to tolerate short-term noise, the rewards of diversification are clear. The MSCI World Index, which is still 70% U.S.-focused, offers a middle ground: a 30% allocation to non-U.S. equities can provide meaningful diversification without straying too far from familiar markets.

A Strategic Rebalance for the New Decade

The VXUS milestone is part of a larger narrative—one where investors are no longer content to bet their futures on a single market or sector. The era of U.S.-centric investing, once seen as the safest harbor, is giving way to a more nuanced understanding of risk and return. This shift is not about abandoning the U.S. but about recognizing that global growth is no longer a monolith.

As the fund's $0.05 expense ratio and broad exposure to both developed and emerging markets make it a compelling vehicle for this strategy, investors would be wise to consider VXUS not just as a tactical play but as a foundational element of a globally diversified portfolio. In a world where the U.S. dollar's dominance is waning and innovation is increasingly decentralized, the message is clear: the future of equities is global, and those who adapt will be best positioned to thrive.