Will 2025 See International Equities ETFs Perform Once Again?
News Summary
International equities ETFs performed strongly in 2025, attracting investors seeking diversification and performance amidst concerns about U.S. domestic stocks, particularly AI-driven concentration risk. The article explores the case for continued positivity for international equities in 2026, highlighting that concentration risk in the U.S. stock market remains a key concern, driving investors abroad to avoid domestic risks like a shifting yield curve and a declining dollar. Moreover, foreign markets offer inherent appeal. A weakening dollar could benefit overseas investors due to currency discrepancies. Factors such as monetary policy changes, doubts over the Fed's independence, and spiraling deficits in the U.S. are cited as potential drivers for further dollar weakness. Many foreign markets are also ahead of the U.S. in cutting cycles and have been more successful at taming inflation since the COVID-19 pandemic, presenting fertile ground for U.S. investors. The piece suggests that active international equities ETFs, exemplified by the T. Rowe Price International Equity ETF (TOUS), can leverage fundamental research to identify opportunities in specific markets or firms, potentially outperforming passive peers.
Background
In 2025, global financial markets witnessed significant growth in international equities ETFs, contrasting with the high concentration risk observed in the U.S. stock market, particularly in AI-driven equities. Investors have grown increasingly concerned about internal vulnerabilities within the U.S. economy, including potential shifts in the yield curve, persistent dollar depreciation, doubts surrounding the Federal Reserve's monetary policy independence, and burgeoning fiscal deficits. Concurrently, many non-U.S. economies have demonstrated greater resilience in managing post-pandemic inflation and have progressed further into their easing cycles compared to the United States. This macroeconomic divergence provides a compelling rationale for U.S. investors to seek opportunities in international markets for diversification and potentially better risk-adjusted returns.
In-Depth AI Insights
Are the current drivers of international equities ETF performance cyclical or structural? - The questioning of Fed independence, spiraling U.S. deficits, and the expectation of a persistently weaker dollar suggest deeper, structural issues. These could persist or even intensify under President Donald J. Trump's administration, challenging the long-term attractiveness of U.S. assets. - Foreign markets' lead in inflation control and monetary policy cycles are more cyclical advantages, which could diminish as global economies synchronize. However, this cyclical edge could extend for several years, providing a sustained window for international exposure. - Investors must discern between these drivers and monitor for any shifts where cyclical advantages transition into structural ones, or vice-versa. What are the strategic implications of a persistently weakening dollar for U.S. investors' global asset allocation? - A sustained weaker dollar implies that U.S. investors could not only benefit from the performance of international assets but also gain additional returns from currency appreciation. This would accelerate a shift away from dollar-denominated assets, which might be perceived as having inherent store-of-value risks. - Such a trend could prompt more U.S. institutional investors to re-evaluate their long-term strategic asset allocations, increasing international exposure and potentially taking more active stances in currency hedging strategies. - For U.S. businesses and consumers reliant on imports, a weaker dollar implies inflationary pressures, potentially leading to more aggressive Fed policies in the future and consequently new market volatility. What non-obvious advantages do active international equities ETFs offer in the current market environment? - In a highly fragmented global macroeconomic and geopolitical landscape, active funds possess the flexibility to allocate across diverse countries, regions, and sectors to capture specific growth pockets, unconstrained by the rigid weightings of passive indices. - Amidst potential trade tensions and supply chain reconfigurations, active managers can identify and invest in companies better positioned to adapt to new globalization paradigms, rather than simply relying on historical market leaders. - This agility allows fund managers to navigate potential pitfalls arising from country-specific risks, regulatory changes, or localized market bubbles, thereby potentially generating more robust alpha in a complex and evolving international market.