The Rise of International Exposure: Why VXUS Is Outperforming Domestic ETFs in 2025

The global equity landscape in 2025 has witnessed a seismic shift in investor behavior, with international exposure emerging as a dominant theme. At the forefront of this trend is the Vanguard Total International Stock ETF (VXUS), which has not only delivered record inflows but also outperformed its domestic counterparts, such as the Vanguard S&P 500 ETF (VOO) and the SPDR S&P 500 ETF Trust (SPY). This divergence reflects a broader recalibration of investor sentiment, driven by U.S. market headwinds, global growth dynamics, and the enduring appeal of diversification.

Record Inflows and Outperformance

VXUS has attracted record inflows of $4.09 billion through mid-December 2025, a testament to its growing appeal amid a $1.3 trillion surge in U.S.-listed ETFs for the year. Its 29% return for the period far outpaces the S&P 500's 15% gain, despite currency headwinds in many international markets. This performance has been fueled by robust local equity gains-often 25-30%-in regions like Europe and emerging markets.

In contrast, domestic ETFs like VOO have seen $120 billion in inflows for 2025 through mid-December, while SPY faced a $20 billion outflow during late December due to tax-related trading. Yet, even with these inflows, U.S. equity ETFs' dominance has waned relative to their international peers. Global ex-U.S. ETFs, including VXUS, have drawn $18.3 billion in inflows by mid-December 2025, signaling a shift in capital allocation.

Investor Sentiment and Structural Shifts

The pivot toward international equities is rooted in a combination of macroeconomic and policy-driven factors. U.S. tariff policies, particularly under the Trump administration, have introduced volatility and inflationary pressures. The average effective U.S. tariff rate rose to 15.8% by August 2025, contributing to higher consumer prices and a weaker dollar. These developments have prompted investors to hedge against U.S. dollar exposure and seek growth in markets less impacted by domestic policy uncertainty.

Meanwhile, global markets have benefited from easing trade tensions and AI-driven growth. The U.S.-China trade truce and the Federal Reserve's accommodative stance in Q3 2025 provided a tailwind for international equities. Additionally, the AI boom has spurred demand for global technology stocks, with mega-cap firms leading the charge. This contrast with the U.S. market's early 2025 volatility-triggered by tariff-related uncertainty-has further tilted investor sentiment toward global opportunities.

Risk-Adjusted Performance and Diversification Benefits

VXUS's outperformance is not merely a function of returns but also risk-adjusted metrics. As of December 15, 2025, VXUS boasts a Sharpe ratio of 1.68, compared to VOO's 0.76, indicating superior returns per unit of risk. Its Sortino ratio (2.36) and Calmar ratio (1.91) also outpace VOO's 1.18 and 0.78, respectively. These metrics underscore VXUS's ability to generate returns while mitigating downside risk-a critical consideration in a year marked by geopolitical and economic turbulence.

The diversification benefits of international exposure are further amplified by the U.S. dollar's weakness. Foreign investors have increasingly hedged their U.S. dollar positions, while U.S. investors have sought to offset domestic inflation through global equities. This dynamic aligns with modern portfolio theory, which emphasizes the value of uncorrelated assets in reducing portfolio volatility.

Strategic Implications for 2025 and Beyond

The case for rebalancing toward international exposure is compelling. While U.S. equity ETFs remain a cornerstone of many portfolios, the 2025 data suggests that global diversification can enhance risk-adjusted returns and mitigate overexposure to domestic headwinds. For investors, this means allocating to funds like VXUS to capitalize on global growth trends and hedge against U.S.-centric risks.

However, challenges persist. Currency fluctuations and geopolitical risks in international markets require careful management. Yet, the resilience of global equities in 2025-despite early-year sell-offs-demonstrates their capacity to recover and outperform in a restructured global economy.

Conclusion

The rise of VXUS in 2025 is not an anomaly but a reflection of broader structural shifts in investor behavior. As U.S. markets grapple with policy uncertainty and inflation, international equities have emerged as a compelling alternative. With record inflows, superior risk-adjusted returns, and a favorable macroeconomic backdrop, VXUS exemplifies the strategic value of global diversification. For investors seeking to navigate the complexities of 2025 and beyond, a rebalanced portfolio with meaningful international exposure is no longer optional-it is imperative.