U.S. Stocks Have Dominated for 15 Years. This Vanguard ETF Could Be the Better Bet for the Next 10.

U.S. stocks have taught investors a powerful lesson pretty much since the financial crisis ended. Betting against the S&P 500 (SNPINDEX: ^GSPC) has largely been a futile effort.

Much of the economic and corporate earnings growth has come from U.S. companies. The early stages of the artificial intelligence (AI) bull market were driven heavily by the Magnificent Seven stocks. Over the past 15 years, the Vanguard S&P 500 ETF (NYSEMKT: VOO) has gained 781%, compared to a 212% return for the Vanguard Total International Stock ETF (NASDAQ: VXUS). That's a gap of nearly 8% per year.

With that kind of leadership, it's no wonder that investing in foreign stocks can feel like a waste. But there's a problem with that thinking. The future may be nothing like the past.

That's why the investment case for the Vanguard Total International Stock ETF could be better than that for U.S. stocks over the next decade.

Image source: Getty Images.

U.S. dominance has come with a price

The S&P 500 hasn't outperformed simply because investors became irrationally confident about it. It happened due to a combination of strong fundamental growth and the willingness of investors to pay higher valuation multiples for stocks.

It's the latter piece that could help create an advantage for international stocks in the coming years. Currently, the Vanguard S&P 500 ETF trades at roughly 20 times the next 12 months' earnings. The Vanguard Total International Stock ETF trades at just 15 times.

That's a substantial discount. While it's not necessarily an indication of what might happen in the future (international stocks have traded at a discount to U.S. stocks for years), it does suggest that U.S. stocks might have a higher bar to clear in terms of corporate performance in order to continue justifying the higher valuation.

Buying even great companies at high valuations can potentially lead to below-average future returns.

Vanguard sees better opportunities outside the U.S.

Interestingly, Vanguard itself says that it sees better return opportunities from overseas in the next decade.

In its latest capital markets forecast, Vanguard projects U.S. stocks returning roughly 4.2% to 6.2% annually over the next decade. Developed international stocks, on the other hand, are projected to return a modestly higher 4.5% to 6.5%.

Granted, those differences are relatively minor, but they represent a significant change from what investors have come to expect in recent years.

There's another potential advantage for international stocks: currencies.

A strong U.S. dollar is considered a headwind for American investors holding foreign stocks, due to unfavorable exchange rate dynamics. Vanguard's models, however, currently predict a weaker dollar in the intermediate term. If that happens, it improves the return potential of international investments.

Would I buy VXUS instead of VOO?

In a diversified equity portfolio, investors should own both U.S. and international stocks. The allocation to each would depend on their time horizon, risk tolerance, and what they already have in your portfolio.

The Vanguard S&P 500 ETF and the Vanguard Total International Stock ETF offer very different portfolios.

The United States is still home to many of the world's biggest companies, especially those engaged in artificial intelligence, cloud computing, semiconductors, and other industries that may very well drive economic growth for years.

International markets have much less technology exposure and much more exposure to cyclical sectors, including financials and industrials. That likely means a less robust growth profile and different exposures to economic conditions.

However, that doesn't mean the U.S. has to perform poorly in order for international stocks to outperform. In 2026, VXUS is outperforming VOO by 2%, and I'd hardly call it a bad year for stocks overall.

All it might take is improved earnings or a narrowing of the valuation gap in order for international investments to have a stretch of outperformance going forward.

A lot of investors assume that investing in anything outside of U.S. mega-cap tech means accepting lower returns. For as much as people hear about the benefits of diversification, it's a hard sell when it means giving up performance.

The next decade could challenge that assumption if earnings begin to accelerate and some of that underlying value can get unlocked.

The S&P 500 still deserves to be a core portfolio holding, but I'd be comfortable adding the Vanguard Total International Stock ETF to balance it out.

David Dierking has positions in Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.