Can Vanguard's International High Dividend Yield ETF Outperform Again in 2026?

The momentum in international stocks in 2025 is carrying over into this year. Just look at the Vanguard Total International Stock Index Fund ETF (NASDAQ: VXUS). That well-known exchange-traded fund (ETF) is up 9.23% year to date, while the S&P 500 is dithering, down 0.14%.

Good news, dividend income investors: You're not left out in the cold in the international equity renaissance. Check out the Vanguard International High Dividend Yield ETF (NASDAQ: VYMI), the international counterpart to the Vanguard High Dividend Yield ETF (NYSEMKT: VYM), the third-largest product in the dividend ETF category.

This international dividend ETF is shaping up to be a 2026 winner. Image source: Getty Images.

On that front, the international ETF isn't a shrinking violet. It has $18.2 billion in assets under management, making it the largest international dividend ETF and the 10th-largest dividend ETF overall. To be sure, those are impressive footnotes, but what really matters is that the Vanguard international dividend ETF is beating both its domestic equivalent and the aforementioned ex-U.S. fund over the past three years, and by wide margins at that. More important than that is getting a handle on whether that trend will continue this year. It can -- here's why.

Diversification and value can be had with this ETF

One of the primary reasons investors tap stocks from outside the U.S. is diversification. This international ETF offers efficient diversification by providing exposure to both developed and emerging market equities. Of course, diversification isn't a guarantee of outperformance, but it's reassuring to know the Vanguard International Dividend ETF can potentially generate upside from multiple corners of the globe.

Fortunately for investors considering the Vanguard International High Dividend Yield ETF, regional diversification is the beginning, not the end, of this fund's benefits. Other factors could morph into 2026 tailwinds for this ETF. For example, although the dollar was one of the worst-performing major currencies last year, it remains expensive relative to some rivals, indicating more downside is possible. That's a plus for foreign companies that sell into the U.S. market, because a weaker greenback lifts their dollar-denominated earnings.

Second, this Vanguard ETF offers value, and not just because it's a dividend fund. Although international equities topped U.S. rivals last year, the former remain attractively valued relative to the latter, implying investors don't have to pay up to access this ETF's perks.

Sector allocation is another reason this fund can continue its hot streak in 2026. It allocates more than half of its weight to financial services and industrial stocks. Granted, not all of those are European equities, but across the pond, bank stocks are considered cheap, and NATO members' rising defense spending is positive for European industrial stocks.

Speaking of Europe...

This international dividend ETF holds 1,535 stocks, 43.6% of which hail from Europe. That's relevant for multiple reasons. Some of the safer European stocks with the highest dividend yields sport lower payout ratios than their U.S. peers, implying room for dividend growth. Also, 47 members of the MSCI Europe Dividend Masters index -- which requires companies to have 10 consecutive years of higher dividends -- are also components in this Vanguard ETF.

All of those benefits can be had for an annual fee of just 0.07%, or $7 on a $10,000 stake.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF and Vanguard Total International Stock ETF. The Motley Fool has a disclosure policy.