Is Now the Time to Bet on International Value with DFIV?

The Dimensional International Value ETF (DFIV) has captured the attention of investors in 2024–2025, delivering a staggering 47% total return over the past year, far outpacing the S&P 500's 16% and the iShares MSCI EAFE ETF (EFA) by 14 percentage points. This performance has sparked a critical question: Is DFIV's recent outperformance a harbinger of a broader rotation toward international value investing, or a temporary surge driven by sector-specific tailwinds? To answer this, we must dissect the fund's strategy, macroeconomic tailwinds, and the sustainability of its gains in a shifting global landscape.

The Drivers Behind DFIV's Outperformance

DFIV's success stems from its disciplined focus on undervalued large-cap stocks in developed international markets, particularly in European financials, energy, and materials. The fund's exposure to companies like Shell, TotalEnergies, and Banco Santander positioned it to capitalize on the 2025 financial sector recovery, as global economic stability and tighter monetary policy reduced risk premiums. Additionally, DFIV's 3% dividend yield provided a dual benefit of income and capital appreciation, while its 16% annual turnover rate minimized trading costs and tax drag.

This strategy aligns with a broader trend: the re-rating of value stocks in international markets. As U.S. growth stocks faced valuation pressures amid rising interest rates, investors turned to undervalued international equities offering higher yields and earnings visibility. For instance, Morningstar data shows that the DFA International Value I fund (DFIVX), DFIV's mutual fund counterpart, returned 17.97% year-to-date as of May 2025, outperforming the S&P 500 ETF (VOO) by nearly 18 percentage points.

Macro Tailwinds: Trade, Geopolitics, and AI

The macroeconomic backdrop for international value investing appears favorable in the near term. The narrowing technological gap between the U.S. and China is expected to ease trade tensions in 2026, reducing uncertainty for global markets. Meanwhile, Europe and Japan are increasing fiscal spending to bolster self-sufficiency in energy and technology, creating demand for value-oriented industrial and materials stocks.

AI-related infrastructure development also plays a role. While U.S. tech stocks dominate AI narratives, international value investors are capitalizing on undervalued firms supplying critical materials and energy for AI expansion. For example, European energy giants like TotalEnergies, which DFIV holds, are benefiting from the global shift toward cleaner energy infrastructure, a trend expected to persist through 2026.

Sustainability of Outperformance: Risks and Uncertainties

Despite these positives, DFIV's long-term sustainability hinges on macroeconomic and geopolitical risks. Currency volatility remains a concern, as the fund's unhedged exposure to foreign currencies could erode returns during periods of dollar strength. Additionally, its concentration in European financials and energy sectors makes it vulnerable to regional economic slowdowns or regulatory shifts.

Looking beyond 2026, the U.S. economy's reliance on AI-driven growth and high-income consumption raises questions about inequality and systemic fragility. If AI-driven productivity gains fail to meet expectations, global growth could stall, dampening demand for international value stocks. Furthermore, trade realignments with China may disrupt supply chains and reduce domestic demand in Asia, complicating the outlook for value-oriented strategies.

ESG and the Future of Value Investing

The role of ESG (Environmental, Social, Governance) factors adds another layer of complexity. While some studies suggest ESG-aligned companies outperform-Bloomberg Intelligence notes low-carbon firms outperformed high-carbon peers by 8% in high-emitting industries over five years-others find no consistent link between ESG scores and returns . For DFIV, which does not explicitly focus on ESG criteria, this ambiguity underscores the need for investors to balance traditional value metrics with evolving sustainability expectations .

Conclusion: A Strategic Bet with Caveats

DFIV's recent outperformance reflects a confluence of favorable sector exposure, macroeconomic tailwinds, and disciplined active management. However, the fund's long-term success will depend on navigating currency risks, sector concentration, and the evolving ESG landscape. For investors seeking to capitalize on a potential rotation toward international value, DFIV offers a compelling case-but one that demands careful monitoring of global trade dynamics and policy shifts.

As AllianceBernstein notes, the 2026 global economy is likely to remain resilient despite frictions, but imbalances persist. For now, DFIV's strategy appears well-positioned to benefit from the current environment. Yet, as with any concentrated bet, diversification and risk management remain paramount.