Don't Count Them Out Yet: Why International ETFs Could Still Outperform in 2026

I once worked with a seasoned investment advisor who liked to say that when American stocks zig, international stocks tend to zag. It sounds a bit simplistic, but in fact, there's a lot of truth to it.

U.S. stocks tend to outperform international stocks for long stretches, and then the trend reverses. Of course, this inverse relationship is not rock solid. In global recessions, for example, most countries' major stock indexes suffer declines.

But aside from that, there are concrete reasons the two groups -- U.S. equities and non-U.S. equities -- often take turns outperforming. The U.S. economy is the world's largest, and the dollar is the global reserve currency. In addition, U.S. equities account for some 65% of global market capitalization. So with the U.S. stock market so large, the two groups of equities tend to act as counterweights to each other.

Recently, international stocks have outperformed. In 2025, non-U.S. developed market stocks, as measured by the Vanguard FTSE Developed Markets ETF (NYSEMKT: VEA), returned 35.2%. Emerging market stocks, as measured by the Vanguard Emerging Markets Stock Index Fund ETF (NYSEMKT: VWO), returned 25.6%.

Both crushed the U.S. stock market, which rose 17.7%, as measured by the S&P 500 index. That index is a good proxy for the entire U.S. stock market, as it represents about 80% of total U.S. market value.

International stocks' outperformance has continued in 2026

So far in 2026, that trend has continued. VEA, which excludes U.S. equities, is up 9.2% year to date. VWO is up 8.1%, and the S&P 500 index has climbed just 1.5%. I believe that international equities -- both in advanced and developing economies -- can and will continue to thrive this year. Why?

First, there's the declining dollar. It fell about 9% last year (against a basket of trade partner currencies ). A weaker dollar means more favorable exchange rates for non-U.S. economies, boosting them and their stock markets. That trend should continue, as the current U.S. administration is in fact encouraging the weakening of the greenback.

"I think it's great," President Donald Trump said on Jan. 27 about the weakening greenback. "I think the value of the dollar -- look at the business we're doing. The dollar's doing great."

There's also the impending end of Jerome Powell's term as Federal Reserve Chair, which will happen in early May. Powell has been very prudent with interest rate cuts. In fact, in January, the Fed's rate-setting committee declined to cut the Fed's target rate, despite intense pressure from the White House to do so. If Trump's nominee to replace Powell is more willing to ease monetary policy, it's likely that the dollar's decline will accelerate this year, as global capital drifts toward countries with higher interest rates.

European stocks are also rallying on a massive uptick in defense spending on the continent. The Trump administration has demanded that NATO allies spend more on their own defense, and they've begun to do just that, stimulating their economies and equity markets.

German and South Korean stocks have been stellar

Last year, I recommended stocks from two nations in particular: South Korea and Germany . Korean stocks, as measured by the iShares MSCI South Korea ETF (NYSEMKT: EWY), are up 29% year to date, driven by government reforms and political stability. German stocks, as measured by the iShares MSCI Germany ETF (NYSEMKT: EWG), have climbed a more modest 3.5% so far in 2026, driven partly by government investment.

Image source: Getty Images.

But stocks of both Germany and Korea, in my opinion, will continue to outperform U.S. stocks through 2026. That holds true broadly for non-U.S. advanced nation stocks, as well as many emerging market stocks. For investors seeking exposure to those regions, the Vanguard FTSE Developed Markets ETF and Vanguard Emerging Markets Stock Index Fund ETF can both serve as convenient, low-cost ways to do so.

Matthew Benjamin has positions in iShares-iShares Msci Germany ETF. The Motley Fool has positions in and recommends Vanguard FTSE Developed Markets ETF and Vanguard FTSE Emerging Markets ETF. The Motley Fool has a disclosure policy.