The Vanguard Total International Stock Index Fund ETF (VXUS 0.36%) has surged 27% year-to-date through Oct. 3, 2025, its best performance in years after averaging just 5.8% annually since 2011. The rally prompts a simple question -- is there still value in this exchange-traded fund (ETF) after such a strong run?
The answer is yes, but with crucial caveats. International stocks trade at 16.2-times earnings versus 28-times for the S&P 500, a 42% discount that reflects real fundamental differences, not just market inefficiency. Before chasing this valuation gap, investors need to understand both why it exists and what sparked 2025's sudden reversal after years of underperformance.
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Why international stocks trade cheaper
The valuation gap isn't arbitrary. U.S. companies generate average returns on equity above 20%, while European firms manage roughly 12% and emerging markets hover around 10%. American businesses dominate the high-margin technology and healthcare sectors, while international indices overweight banks, industrials, and energy -- sectors with structurally lower profitability.
Geographic composition matters too. The fund spreads across 8,621 holdings with approximately 40% in Europe, 30% in Pacific developed markets, and 30% in emerging markets. Top holdings include Nestlé, Samsung, ASML, and Taiwan Semiconductor -- though ASML and Taiwan Semiconductor dominate their respective markets, these companies represent tiny weights in the fund compared to how Apple or Microsoft dominate the S&P 500.
Currency risk adds another discount factor -- the fund doesn't hedge, meaning a strengthening dollar directly reduces returns. These structural realities explain why international stocks have traded cheaper for years, not months.
What changed in 2025
Three shifts have helped drive international equities in 2025. First, the dollar has weakened significantly -- down around 10% to 11% in the first half -- reducing currency headwinds for foreign assets. Second, China is rolling out targeted stimulus tools and loosening property constraints to spur investment, signaling a willingness to prop up growth. Third, Europe's economy is showing signs of stabilization, with euro-zone factories returning to growth in recent surveys, helping lift optimism that earnings could surprise to the upside.
These tailwinds won't last forever. The dollar could rebound if U.S. growth accelerates. China's stimulus may prove transient, as weak demand and real estate stress still weigh heavily. Europe's recovery remains fragile -- Germany, in particular, is only just avoiding recession in some forecasts. But after years of underperformance, international markets finally aligned with positive momentum, helping explain the strong performance in funds like the Vanguard Total International Stock Index Fund.
The income and diversification case
Despite the rally, the fund still offers value for specific purposes. Its 2.78% dividend yield nearly doubles the S&P 500's 1.3%, providing real income in a low-yield world. The fund's 0.05% expense ratio costs almost nothing compared to actively managed international funds charging 1% or more. Geographic diversification reduces dependence on U.S. tech giants that now comprise nearly 30% of the S&P 500.
But diversification isn't a free lunch. The fund's emerging market exposure adds volatility -- expect 20% drawdowns during global sell-offs. European banks face negative rates and weak loan growth. Asian exporters depend on global trade remaining open. The fund works best as portfolio insurance against U.S. concentration risk, not as a path to market-beating returns. History shows international stocks can underperform for decades, not just years.
The allocation answer
So is the Vanguard Total International Stock Index Fund still a buy? Yes, but only as a 10% to 20% portfolio allocation, not a core position. The valuation gap reflects genuine quality differences that won't disappear. The 2025 rally had specific catalysts that may not repeat. The fund's 5.8% annual return since 2011 reminds investors that cheap can stay cheap.
For investors overweight U.S. stocks after years of outperformance, adding international exposure makes sense. The fund provides geographic diversification, higher yield, and valuation upside if conditions align. Just recognize that the valuation discount reflects real structural differences -- lower returns on equity, currency risk, and different sector composition. The fund works best as a complementary holding, not the foundation for building wealth.
