The Most Misunderstood Vanguard ETF

International stocks have steadily lagged the S&P 500 for the last 15 years. That kind of chronic underperformance doesn't build a good reputation and it certainly doesn't inspire investors to throw their money at it.

Many people will label the Vanguard Total International Stock ETF (NASDAQ: VXUS) (or any international fund for that matter) a "bad" fund. But you can't call a fund bad if you only look at it through the lens of performance. It ignores how the portfolio is structured, what its core strategy is, and what it means to provide for investors.

For example, the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) just underperformed the market badly from 2023 to 2025. But its core strategy is to target companies with healthy balance sheets, long histories of dividend payments, and above-average yields. That sounds like a pretty good strategy to me. In its case, it's a good fund whose strategy was simply out of favor, something that happens with all strategies from time to time.

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The Vanguard Total International Stock ETF falls into that category.

It tracks the FTSE Global All Cap ex-US Index, which is designed to simply provide broad exposure to the entire foreign stock market. Notice that I didn't say its goal was to beat the S&P 500. It's simply trying to give investors cheap, easy access to a segment of the equity market.

But if you want to compare international stocks to U.S. stocks, consider a few factors.

The U.S. and international markets are completely different

It's no surprise that Technology is the biggest segment of the S&P 500, currently comprising around 33% of the index. Its next largest exposures are Financials (13%), Consumer Discretionary (11%), and Communication Services (10%).

Now look at the International ETF. Its biggest sector holdings are Financials (23%), Industrials (15%), Technology (14%), and Consumer Discretionary (10%).

International markets are much more cyclically sensitive. And they have less than half the tech exposure as the United States.

We make the argument all the time about why diversification in a portfolio is important. This is exactly why. Because they look so different, it's reasonable to expect that they'll perform differently too. The past decade has been all about tech development and more recently, artificial intelligence (AI) development. So it shouldn't surprise anyone that the economy that's more dependent on tech would outperform those that aren't.

That also makes it likely that when the market shifts away from tech and finds better relative value in manufacturing-heavier economies, international is likely to outperform again.

The Vanguard Total International Stock ETF is a good fund

If you consider what this ETF offers instead of how it performs relative to the S&P 500, you should like what you find.

It provides access to more than 8,500 different stocks. Its $133 billion in assets under management (AUM) ensures that it's highly liquid and trade-able. And with an expense ratio of just 0.05%, it costs next to nothing to own.

That's the very definition of a strong fund. And why it's one of the most misunderstood.

David Dierking has positions in Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Vanguard Total International Stock ETF. The Motley Fool has a disclosure policy.