Is SCHF the Right International ETF for a Diversified Portfolio?

It may be an understatement to say international stocks are experiencing an epic renaissance in 2025. With time running out on the year, it's clear the MSCI EAFE Index will beat the S&P 500 for just the second time since 2019 and will do so by a wide margin.

That spells relief for investors who had embraced international equities in the name of diversification, only to be left disappointed as domestic growth stocks thoroughly outpaced foreign equities. The script has flipped, and with the diversification case intact, it could be a good time to examine exchange-traded funds (ETFs) such as the Schwab International Equity ETF (NYSEMKT: SCHF).

When it comes to diversification, this ETF delivers. Image source: Getty Images.

Before jumping into a deeper examination of this fund, a couple of points are worth acknowledging. First, it has beaten the MSCI EAFE Index by nearly 300 basis points over the past three years. Second, although it has "international" in its name, the Schwab fund primarily focuses on developed market stocks. Some international funds mix developed and emerging markets equities, but not this product.

Broaden your horizons with this Schwab ETF

This international ETF may be just what the doctor ordered for American investors grappling with home country bias. While the U.S. dominates in terms of global equity market capitalization, 40% of investable markets are found outside this country. Investors who don't at least examine those opportunities may not be missing out on growth opportunities, but they may be increasing portfolio risk by not adding diversification.

This Schwab ETF offers additional forms of diversification, some of which underscore the fund's utility for investors currently overexposed to U.S. stocks. Consider this: An investor who buys an S&P 500 ETF or index fund gains exposure to 503 stocks, with Nvidia accounting for 7.33% of the portfolio and tech stocks collectively commanding 34.08% overall. With this Schwab ETF, market participants receive a basket of nearly 1,500 stocks, with none representing more than 1.6% of the roster, and with tech names accounting for just 10.17% of the lineup.

This international ETF offers other diversification perks. For example, if a recession occurs in the U.S., it'd be punitive to domestic stocks, but not all global markets will follow suit. In other words, by investing internationally, investors reduce their dependence on the U.S. economic cycle.

Another alluring trait of this ex-US ETF is that, although it's not a dedicated value fund, considerable value remains in international stocks, even with this year's rally. On the other hand, domestic stocks are by no means cheap.

Speaking of value...

For diversification, there's a lot to like about this Schwab ETF. That case is bolstered by expectations that international stocks are in the early days of their rebound, as well as the aforementioned compelling valuations.

There's more good news. Market participants can access those favorable traits for a mere 0.03% in fees per year, or $3 on a $10,000 position, confirming this diversifying ETF is ideal for long-term investors.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.