Can the Vanguard International High Dividend Yield ETF Sustain Its 2025 Outperformance in 2026?

The Vanguard International High Dividend Yield ETF (VYMI) delivered a remarkable 29.6% return in 2025, outpacing the S&P 500's 15.6% gain. This performance, driven by exposure to European financials and energy stocks amid a weakening U.S. dollar, has sparked investor interest in whether the fund can replicate its success in 2026. To evaluate this, we must dissect VYMI's structural advantages and the macroeconomic risks it faces in a shifting global landscape.

Structural Advantages: A Foundation for Resilience

VYMI's appeal lies in its cost efficiency, diversification, and focus on high-quality dividend payers. With an expense ratio of 0.17%, it offers a low-cost gateway to international equities. The fund holds over 1,500 securities across developed and emerging markets, including blue-chip names like Nestlé, Toyota, and Royal Bank of Canada. These companies are characterized by stable cash flows and a history of consistent dividend payments, providing a 4% yield that cushions against market volatility.

. The fund's broad diversification also mitigates sector-specific risks. For instance, while European financials account for 42% of its allocation, the portfolio spans energy, industrials, and consumer staples, ensuring exposure to multiple drivers of global growth. This structure aligns with Vanguard's strategy to balance income generation with capital preservation, making it a compelling option for investors seeking long-term stability.

Macro Risks: Navigating a Complex Landscape

Despite its strengths, VYMI faces headwinds in 2026. A key vulnerability is its concentration in European financials, which could falter if interest rates stabilize or loan growth slows. While rising rates and Germany's fiscal stimulus have bolstered bank earnings in 2025, a reversal of these trends-such as a slowdown in infrastructure spending or regulatory tightening-could erode returns.

The energy sector, another cornerstone of VYMI's performance, remains exposed to geopolitical tensions and demand fluctuations. For example, a global economic slowdown or a shift in energy transition policies could depress energy prices, impacting the profitability of holdings like BP or Shell. Additionally, currency fluctuations pose a double-edged sword: while a weak dollar amplified gains in 2025, a stronger dollar in 2026 could erode returns for U.S. investors.

. Tariff uncertainties further complicate the outlook. As VYMI's portfolio includes export-heavy economies like Germany and Japan, trade disputes or protectionist policies could dampen corporate earnings. This risk is amplified by the U.S. government's focus on reshoring industries, which may lead to higher tariffs on imports.

2026 Outlook: Balancing Growth and Volatility

Vanguard's 2026 economic forecasts suggest a modest U.S. GDP growth of 2.25%, supported by AI-driven investment and fiscal policies. While this bodes well for global demand, the eurozone is expected to grow at a slower 1%, constrained by U.S. tariffs but buoyed by Germany's infrastructure spending. European banks, a major component of VYMI, are projected to outperform due to stable interest rates and capital generation, which could offset some of the fund's sector-specific risks.

Currency trends also favor VYMI in the near term. JPMorgan and ING forecast the EUR/USD rate to reach 1.22 by year-end 2026, implying a weaker dollar that could enhance returns for international dividend stocks. However, this tailwind hinges on the Federal Reserve maintaining a dovish stance while European central banks hold rates steady. A sudden dollar rebound, driven by inflation surprises or geopolitical shocks, could disrupt this dynamic.

. Dividend Sustainability: A Long-Term Edge
VYMI's structural advantages extend to its dividend sustainability. The fund's holdings are predominantly large, multinational corporations with strong balance sheets and a track record of preserving payouts during downturns. For example, Nestlé and Toyota have consistently increased dividends despite economic cycles, providing a reliable income stream for investors. This resilience is critical in 2026, as global markets grapple with stagflationary pressures and AI-driven labor market shifts.

Conclusion: A Calculated Bet for 2026

While VYMI's structural strengths-low costs, diversification, and high-quality holdings-position it well for 2026, its macro risks cannot be ignored. The fund's heavy exposure to European financials and energy sectors, coupled with currency and tariff uncertainties, introduces volatility. However, its dividend yield, broad diversification, and alignment with global growth trends suggest it remains a compelling option for investors willing to navigate near-term turbulence.

As Vanguard notes, the key to sustaining outperformance lies in balancing income generation with risk management. For those prioritizing long-term stability over short-term speculation, VYMI's structural advantages may outweigh its macro risks-provided investors remain vigilant to evolving global dynamics.