How to Invest in International Stocks

Why Invest Internationally?

U.S. investors have a well-documented home bias — a tendency to hold far more domestic stocks than global market weights would suggest. Yet the U.S. accounts for only about 45–55% of the world's stock market capitalization. By holding only U.S. stocks, an investor ignores roughly half the world's investable companies and forgoes the diversification benefits of exposure to other economies.

The case for international investing rests on diversification and opportunity. Different countries and regions move through economic cycles at different times. When U.S. markets lag, international markets may lead, and vice versa. Over the long run, combining U.S. and international stocks has historically produced a smoother ride than holding either alone, because the two are not perfectly correlated. There have been multi-year stretches (such as the 2000s) when international stocks outperformed U.S. stocks significantly, and stretches (the 2010s) when the reverse was true. No one can reliably predict which will lead next.

International markets also offer exposure to fast-growing economies. Emerging markets — including India, Brazil, and parts of Southeast Asia — contain the majority of the world's population and a large share of its growth. While riskier, they offer return potential that mature economies may not. Even developed international markets (Europe, Japan, Australia) contain world-leading companies in industries where the U.S. is underrepresented, such as luxury goods, advanced manufacturing, and certain healthcare sectors.

Developed vs Emerging Markets

International stocks are typically divided into two categories.

Developed markets are mature economies with established financial systems, strong legal protections, and stable currencies. Examples include Japan, the United Kingdom, Germany, France, Canada, Australia, and Switzerland. They are generally less volatile than emerging markets and offer exposure to large, established multinational companies. A developed-markets index fund is the core of most international allocations.

Emerging markets are economies in rapid development with growing middle classes and financial systems still maturing. Examples include India, China, Brazil, Mexico, and South Africa. They offer higher growth potential but come with greater volatility, political risk, currency risk, and less transparent governance. Emerging markets can produce spectacular returns in good years and steep losses in bad ones.

A well-rounded international allocation typically holds both, with developed markets as the larger portion and emerging markets as a smaller, growth-oriented slice. Many total international index funds include both in a single fund, simplifying the decision.

Ways to Invest in International Stocks

Individual investors have several ways to gain international exposure.

International index funds and ETFs. The simplest and most effective approach for most investors. A total international stock fund (such as VXUS) holds thousands of companies across developed and emerging markets worldwide. This provides instant diversification, low cost, and no need to research individual foreign companies. This is the recommended starting point.

Developed-market and emerging-market funds. For investors who want to control the split, separate funds for developed and emerging markets allow you to overweight or underweight each. For example, you might hold 80% of your international allocation in a developed fund and 20% in an emerging fund.

American Depositary Receipts (ADRs). Many large foreign companies trade on U.S. exchanges as ADRs — certificates representing shares of the foreign stock. ADRs let you buy foreign companies like Toyota, Nestlé, or Samsung through a standard U.S. brokerage account, priced in dollars. This is convenient but concentrates risk in individual companies.

Direct foreign stock purchases. Some brokers allow buying stocks directly on foreign exchanges. This is complex, involving foreign currency conversion, foreign tax considerations, and sometimes higher fees. It suits only advanced investors with specific needs.

For the vast majority of investors, a low-cost international index fund is the optimal choice — it captures the diversification benefit without the complexity and risk of individual foreign stocks.

Understanding Currency Risk

A subtle but important feature of international investing is currency risk. When you own a foreign stock, your return depends not only on the stock's performance in its local market but also on the exchange rate between the U.S. dollar and that currency.

If the foreign currency strengthens against the dollar, your returns are boosted when converted back to dollars. If the foreign currency weakens, your returns are reduced — even if the stock rose in its local market. For example, if a European stock rises 10% in euros but the euro falls 10% against the dollar, your dollar return is roughly zero.

Over long periods, currency movements tend to be unpredictable and can add or subtract a few percentage points of return per year. Some international funds hedge currency risk (using derivatives to neutralize exchange-rate movements), while most do not. Hedged funds reduce currency volatility but add cost; unhedged funds expose you to currency movements, which can be a diversifier or a drag depending on the period.

For most long-term investors, currency risk is simply part of international diversification and does not need to be hedged. Over decades, currency effects tend to average out, and the diversification benefit outweighs the added volatility. Use our investment return calculator to model how different return assumptions affect your portfolio.

Foreign Taxes and Withholding

International investing introduces tax considerations beyond those of domestic stocks.

Many countries levy a withholding tax on dividends paid to foreign investors. For example, a European country might withhold 15–30% of the dividend at the source before it reaches your account. The U.S. allows you to claim a foreign tax credit on your U.S. tax return to offset (or in some cases refund) this withholding, preventing double taxation — but only for dividends held in taxable accounts. The credit is not available in tax-advantaged accounts like IRAs, where the withheld tax is effectively lost.

This creates an asset-location decision: international funds may be slightly more tax-efficient in taxable accounts (where you can claim the foreign tax credit) than in IRAs. However, the difference is usually small and should not override your overall allocation strategy. Most broad international funds report the foreign tax paid on your annual tax statement (Form 1099-DIV), making the credit easy to claim.

How Much International Exposure?

There is no consensus, but common guidance suggests 20–40% of your stock allocation in international stocks. This reflects global market capitalization (roughly 45% non-U.S.) while accounting for the home bias most investors are comfortable with. The exact figure matters less than having meaningful exposure — a token 5% allocation provides little diversification benefit, while 30–40% captures most of it.

Some advisors recommend "market cap weighting" — holding international stocks in proportion to their share of global market cap (about 45%). Others recommend a smaller allocation, arguing that large U.S. companies already have substantial international revenue exposure. Both arguments have merit; choose an allocation you can stick with and rebalance periodically.

A simple, robust approach: hold 30% of your stock allocation in a total international index fund and 70% in a total U.S. fund. This captures the bulk of the diversification benefit without over-concentrating abroad. See our guide on building a diversified portfolio for the full framework.

Risks of International Investing

Geopolitical risk. Foreign companies operate under different legal and political systems. Changes in government, regulation, or trade policy can affect returns. Emerging markets carry higher geopolitical risk than developed markets.

Currency risk. As described above, exchange-rate movements can add or subtract from returns. This is a feature of international diversification, not necessarily a problem, but it adds volatility.

Information and governance risk. Foreign companies may have less transparent accounting, weaker shareholder protections, or less reliable financial reporting than U.S. companies, particularly in emerging markets. Index funds mitigate this by diversifying broadly.

Concentration within funds. Some international index funds are heavily concentrated in a few sectors or countries. For example, a developed-markets fund may be heavily weighted toward Japan and Europe. Understand what your fund holds.

Tracking error and cost. International funds often have slightly higher expense ratios than domestic funds due to the cost of managing foreign holdings. Choose low-cost funds; the difference compounds over time.

A Real-World Example

Consider an investor with a $200,000 portfolio who holds only U.S. stocks. Concerned about concentration, she adds a broad international index fund targeting 20% of her portfolio, or $40,000. Over the next decade, U.S. and international returns diverge as they always do: in some years U.S. stocks lead, in others international stocks lead, and the cycles rotate based on currency moves, growth differentials, and valuations. By holding both, her portfolio's path is smoother than either alone, because the two don't move in perfect lockstep — when U.S. stocks dip, international may hold steady or rise, and vice versa. She also accepts currency risk, knowing that a stronger dollar reduces her international returns while a weaker dollar boosts them, and that over long periods these effects tend to average out. The key is that she rebalances annually, trimming whichever has grown and adding to the laggard, which forces her to buy low and sell high across regions. The result is a more diversified portfolio that captures global growth rather than betting everything on a single country's market — a prudent approach for money she'll need decades from now.

For official guidance, the Vanguard provides detailed, up-to-date information.

You can verify current figures directly with the SEC.

The IRS is a reliable source for the latest rules and limits.

The Bottom Line

International investing is a core component of a well-diversified portfolio. By holding 20–40% of your stock allocation in a low-cost international index fund, you capture diversification benefits and growth opportunities beyond U.S. borders, with manageable added risk. Keep it simple: a single total international fund covers both developed and emerging markets. Pair it with a U.S. fund, rebalance annually, and hold for the long term. For the underlying logic, revisit our Investing 101 guide. The long-run case is supported by data: over multi-decade periods, international stocks have delivered returns comparable to U.S. stocks, and because the two markets take turns leading, holding both has historically produced a smoother path than either alone. A simple 20% to 40% international allocation captures these benefits with minimal complexity.