Quick Take:
International markets are finally outperforming the U.S. in 2025, with VXUS up 25% versus the S&P 500’s 13%. But much of that gain is tied to a weakening dollar and global money printing — not just fundamentals. I also see potential in small-cap value stocks and India as a long-term growth story. – Not financial advice!
I was replying with a long comment to a YouTube video about investing, and it turned into something worth sharing here. I’ve cleaned it up a bit to make it flow like a proper post — but the ideas are the same: how I’m thinking about markets right now and where opportunities might lie.
When people ask me what to buy, I always start with one key principle:
focus on total return, not dividends.
Dividends are nice, but they’re just one piece of the puzzle. What really matters is total return — the combination of price growth plus dividends. That’s what grows your wealth over time.
International Markets Are Finally Waking Up
In November 2024 a friend told me what a dog his internationl stocks were and said he was going to sell them adn buy all S&P 500 I mentioned to him the idea of reversion to the mean While I was rewarded quickly, after years of underperformance, international markets have been on an absolute tear in 2025.
- VXUS — the total international ETF (about 25% emerging markets) — is up roughly 25% year to date.
- VWO, which tracks only emerging markets, is up around 21%.
- Meanwhile, the S&P 500 (VOO) is up just 13% this year.
It’s been a long time since we’ve seen this kind of outperformance from non-U.S. stocks. But before we get too excited, it’s worth asking why.
Factors Driving International Resurgence
Several factors have driven the recent resurgence in international markets.
Concerns about the U.S. trade war and tariffs have pushed investor attention abroad, while a weaker U.S. dollar has amplified gains for dollar-based investors holding foreign assets.
The U.S. Dollar Index has declined roughly 9% this year, giving a lift to unhedged international equities.
That currency impact is easy to see when comparing VXUS to hedged strategies.
For example:
- Xtrackers MSCI EAFE Hedged Equity ETF (DBEF) and
- iShares Currency Hedged MSCI EAFE ETF (HEFA)
are both up about 11.4% this year — solid returns, but well below the 25% gains seen in unhedged funds like VXUS.
In other words, a large portion of the international rally is being driven by the decline in the U.S. dollar, not just by improving fundamentals abroad.
👉 You can read more about this dynamic in a recent ETF.com article here:
“VXUS Tops $100B as ETF Investors Embrace International Stocks”
Inflation, Money Printing, and “Bigger” Returns
I suspect that in the future, the stock market’s returns might look higher than historical averages — not necessarily because companies are more productive, but because money printing and inflation are inflating nominal returns.
Historically, the S&P 500 returned about 11% per year, with maybe 3% of that driven by inflation and monetary expansion.
If we enter a world where inflation runs closer to 7%, then even if the real return stays about the same (around 8%), the headline number could look like 15% annual returns.
Obviously, that’s not guaranteed — just a thought experiment. But it’s a good reminder that higher nominal returns don’t always mean higher real returns.
Be Greedy When Others Are Fearful
Warren Buffett’s old rule still applies:
“Be fearful when others are greedy, and greedy when others are fearful.”
So what are investors fearful of right now?
Small-cap stocks.
- VIOV (small-cap value ETF) is up only 2% this year.
- VB (small-cap blend) is up around 6.5% year to date, and about 52% over the past 5 years.
- The S&P 500, by comparison, is up 90% over that same period.
Historically, small caps have outperformed large caps over the long term — and markets tend to revert to the mean. That doesn’t mean small caps will outperform next year, but it might be time to start paying attention to them again.
A Closer Look at India
One specific market I’ve been watching is India, through the INDA ETF. I’ve personally allocated about 1% of my portfolio there. While it is actually -1% for the year that adds to it’s intregue! As I noted you want to consider buying the losers as they will likely revert to their mean higher returns.
I’ve traveled to India and work with suppliers there who produce castings and tubing. The country reminds me a lot of where China was a couple of decades ago — rapid growth, huge labor pool, and rising industrial capacity.
Here’s a quick comparison:
- Average income in India: about $2,000 per year
- Average income in China: about $15,000 per year
India also has another advantage — it’s a democracy, politically more aligned with the U.S., and open to global capital and trade. That combination of low base income (meaning huge growth potential) and political stability makes India a fascinating market to watch over the next decade.
Wrapping It Up
So, what should you buy?
That depends on your goals — but here are the themes I’m watching:
- International markets, especially emerging economies
- Small-cap value stocks that have been left behind
- And long-term growth plays like India
Just remember — higher returns on paper may reflect inflation, not real productivity. Always think in terms of real value creation, not just nominal gains.
And, of course, this isn’t financial advice — just my perspective on how I’m thinking about global investing in 2025.
What do you think? Are you adding international exposure or doubling down on U.S. stocks?
Share your thoughts below — I love reading different perspectives on where people see opportunity.
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