For more than a decade, international stocks consistently failed to keep up with the S&P 500 (^GSPC 1.28%). Low interest rates, stronger economic growth, and an affinity for U.S. stocks all helped drive the rally.
2025 marked a reversal of that trend. Investors began paying attention to valuations again. Expected growth rates in international economies were accelerating. The Federal Reserve is unlikely to provide much rate cut assistance. Those factors helped to finally unlock some of the inherent value in this group.
The 18% total return for the Vanguard S&P 500 ETF (VOO 1.30%) in 2025 was unquestionably impressive. But it lagged the 32% total return of the iShares Core MSCI EAFE ETF (IEFA 1.36%) by a wide margin (EAFE stands for Europe, Australasia, and the Far East).
Image source: Getty Images.
The Vanguard International High Dividend Yield ETF (VYMI 1.52%) did even better. It returned 38% thanks to its deeper value profile and overweighting in some of the year's better-performing stocks and sectors. And the momentum hasn't stopped. Year to date through Feb. 11, it has gained another 10%, outpacing both the S&P 500 and EAFE indexes again.
Given the way that the market has turned toward cyclical, defensive, and value stocks in 2026 (and the way that momentum has sustained), I think that it's looking like another good year for the Vanguard International High Dividend Yield ETF.
NYSEMKT: VOO
Key Data Points
Value and yield provide meaningful advantages
It's common for international stocks to trade at a lower price/earnings (P/E) multiple than the S&P 500. Dividend stocks are typically even cheaper than that, and this ETF is no exception.
The Vanguard International High Dividend Yield ETF has a P/E of 13.5, or roughly half that of the S&P 500. That valuation gap has the potential to provide a meaningful downside cushion should the global growth cycle begin to slow.
NASDAQ: VYMI
Key Data Points
The fund also has a dividend yield of 3.3%, roughly triple the yield currently being offered by the S&P 500. That could provide a material yield enhancement on top of the capital growth potential.
International earnings growth is expected to accelerate
One of the things that's been a drag on overseas stock performance lately has been a lack of earnings and revenue growth. In 2025, EAFE countries collectively grew their earnings by just over 1%. Emerging markets posted considerably better 10% growth, but rates across individual economies were scattered.
That's likely to improve this year. EAFE is expected to deliver 9% earnings growth, and emerging markets are forecast to rise to 17%. That puts international earnings growth at least on par with the S&P 500. When growth rates are similar, the comparatively cheaper group tends to look more attractive.
International dividend stocks look ready for another strong year
Given the improvement in fundamentals and attractive valuations, the Vanguard International High Dividend Yield ETF could be poised to crush the S&P 500 yet again. Earnings growth acceleration alone should help fuel share price gains. But I wouldn't be surprised to see a momentum-driven P/E expansion provide additional returns.
International stocks have lagged U.S. stocks for years. It looks like the trend is finally starting to reverse.
