Vanguard's own asset allocation recommendations put 40% of stock allocation in international. Jack Bogle, before he died, recommended 0%. Warren Buffett tells investors to own the S&P 500 only. When the founder of the world's largest index fund company and the most successful living investor both disagree with the company Bogle founded, something is being overlooked.
The answer to "how much international should I own" depends on a question that most investors skip: what are you actually trying to accomplish?
What VXUS Owns
Vanguard Total International Stock Index (VXUS) holds about 7,800 non-US public companies. The breakdown:
- Developed markets: ~75% (Japan, UK, Canada, France, Germany, Switzerland lead)
- Emerging markets: ~25% (China, India, Taiwan, Korea, Brazil)
- Top 10 holdings: TSMC, Samsung, Novo Nordisk, Nestlé, Toyota, ASML, Shell, Novartis, HSBC, Tencent
Expense ratio 0.07%. The ETF form trades like any US stock during US market hours, despite its holdings being on 40+ foreign exchanges.
The Historical Return Argument
From 1970-2009, international stocks outperformed US stocks. From 2010-2023, US crushed international. The gap has been roughly 5-7% annualized for 14 years — the largest sustained divergence in modern market history.
Proponents of international diversification argue this divergence is itself the argument. US stocks are expensive on every traditional valuation metric. Shiller P/E for US large-cap is ~32. For developed international, it's ~18. For emerging markets, ~12. Mean reversion, if it happens, favors international.
Opponents point to structural differences. US companies dominate digital platforms. US has the only global reserve currency. US corporate governance, for all its flaws, beats most alternatives. US companies already generate 40% of revenue outside the US — you get international exposure implicitly through S&P 500 companies.
The Currency Problem
If you're a US-based investor retiring in US dollars, foreign stocks expose you to currency risk in a way that domestic stocks don't. When the dollar strengthens, international returns (in USD terms) fall. Over 2014-2022, dollar strength explained much of international underperformance — the underlying companies did fine, but the currency translation hurt.
This cuts both ways. Dollar weakness boosts international returns. If you expect US currency dominance to fade, international holdings hedge that. If you expect dollar dominance to persist, international holdings are a drag.
Hedged vs. unhedged international funds let you pick your exposure. VXUS is unhedged — you bear the currency risk. DBEF hedges to USD, removing currency exposure but costing 0.35% annually.
The Implicit International Argument
Apple earns about 60% of its revenue outside the US. Coca-Cola earns 65% outside. Microsoft, 50%. The S&P 500 in aggregate derives ~40% of its sales from international markets. When you own VTI, you're already getting substantial international economic exposure — just wrapped in US-domiciled corporate structures.
Buffett's argument, simplified: the S&P 500 is already a global portfolio through corporate revenues. Adding VXUS on top is either genuine incremental diversification or redundant exposure, depending on your view of the difference between "US company selling globally" and "non-US company selling globally."
Correlation Has Increased
The diversification benefit of international depends on correlation. In the 1970s, US and international stock correlation was ~0.45. Low correlation meant one could rise while the other fell — real diversification.
Today, US and international developed markets correlate at ~0.85. In 2008, every major global equity market fell together. In 2020's COVID crash, same story. Globalization has made the diversification argument weaker than it used to be. You still get some benefit — correlations aren't 1.0 — but it's not what the 1970s research suggested.
Emerging markets correlate less tightly with US (~0.70), so EM specifically might offer more diversification. But EM is also vastly more volatile — not always a trade you want.
The Allocation Decision
Defensible positions on the spectrum:
- 0% international: Buffett's position. Simple, low-cost, avoids currency risk. Relies on US exceptionalism continuing.
- 10-20% international: Compromise. Gets most diversification benefit, acknowledges US is the dominant market.
- 30-40% international: Vanguard's recommendation. Market-cap neutral (US is ~60% of global market cap). Philosophically consistent.
- 50%+ international: Aggressive mean-reversion bet. Suggests you think US will underperform.
For most investors, 15-25% is the boring right answer. It captures meaningful diversification if you're wrong about US dominance. It doesn't overweight a sector that has underperformed for 14 years. It's simple enough to hold through underperformance.
When to Rebalance Toward International
The argument for increasing international allocation gets stronger as the valuation gap widens. When US P/E is 25 and international P/E is 15, international is relatively cheap — not guaranteed to outperform, but the base rates favor it.
When US P/E is 15 and international is 20, you probably want less international, not more. Current ratios (US expensive, international cheap) lean toward rebalancing toward international at the margin.
This isn't market timing. It's using valuation as a long-run expected-return input, which is academically defensible. The caveat: this logic has been in place since 2017, and the trade has lost money every year since. Patience is the price.
What I Actually Do
My own position: 20% VXUS. Low enough that I can hold it through periods of underperformance without questioning it. High enough that if international has a decade-long comeback, I participate materially. The allocation is set, I don't touch it, I rebalance annually with new contributions.
The right answer for you depends on what you can hold through pain. 30% VXUS underperforming for 15 years — can you keep buying it? If yes, hold 30%. If no, hold less. The optimal portfolio is the one you won't abandon at the bottom.