Is it Time for U.S. Investors to Reconsider International Stocks?

  • Developed Markets and Emerging Markets equities have trailed U.S. equities in eight of the last 10 years.
  • The S&P 500 has outperformed the MSCI EAFE Index and the MSCI Emerging Markets Index by an average of 7.7% and 8.8% annually in the last decade, respectively.
  • As U.S. investors consider increasing their international equity exposures, they need not sacrifice returns at the expense of diversification.

Developed (ex-U.S.) and emerging market stocks had a rather lackluster performance in 2024 and now trail U.S. equities by substantial margins over three, five and 10 years. The MSCI EAFE Index, a widely used benchmark for international developed markets, posted a total return of 4.3% in 2024, and is up just 6.6% on a cumulative total return basis in the last three years. MSCI Emerging Markets Index, the most followed benchmark for emerging markets, posted a slightly better return of 8.1% in 2024, yet over the past three years the index is down -4.4% in terms of cumulative total returns.

With MSCI EAFE and MSCI Emerging Markets trailing the S&P 500 Index by an average of 7.7% and 8.8% per year since 2015, investors are beginning to think that no significant capital appreciation can be expected any longer from markets outside the U.S. We believe otherwise. Not only are there significant gains to be had from both the developed markets and emerging markets, but exposure to these asset classes can also provide diversification benefits to the overall portfolio. How investors gain exposure to the best opportunities outside the U.S. is a different story and MarketGrader’s international indexes show why. Figure 1 presents the performance of MarketGrader’s flagship developed market ex-U.S. & emerging markets indexes and compares them to the widely followed benchmarks cited above.

Figure 1. MarketGrader Developed Markets (ex-U.S.) & Emerging Markets Indexes: Total Cumulative Returns versus Benchmarks (in USD)

Time PeriodMarketGrader Developed Markets (ex- U.S.)MSCI EAFEMarketGrader Emerging Markets Country Capped IndexMSCI Emerging Markets
20249.8%4.3%18.7%8.1%
Three Years19.7%6.6%31.1%-4.4%
Five Years63.5%29.1%64.6%11.0%
10 Years156.8%74.2%140.7%48.6%
Sources: FactSet & MarketGrader Indexes

While Figure 1 highlights two of our broadest international indexes, which are apt substitutes for the widely followed benchmarks, MarketGrader currently calculates 42 international equity indexes that use our passive GARP + Quality smart beta methodology to select stocks from our coverage of more than 35,000 companies outside the U.S. Below we summarize how our international indexes have done relative to their actively managed peers, where we rely on Morningstar’s database. (A complete comparison of MarketGrader’s Global Indexes against their benchmarks is available here.)

In 2024, 30 of our 42 international indexes beat their benchmarks and 35 ranked in the top half of their peer categories[1]. In fact, in 2024 our international equity strategies performed even better against their peer groups than the MarketGrader U.S. equity investment strategies did against theirs, as reported in our most recent article.

In 2024:

  • 35 of MarketGrader’s 42 International Indexes were in the top half of their active peer groups, meaning they outperformed more than 50% of active managers in their Morningstar catergory.
  • 25 finished in the top quartile of active managers, meaning they beat 75% of their category peers.
  • 14 MarketGrader Indexes were in the top decile, meaning they bested 90% of active funds.

As with MarketGrader’s U.S. stock Indexes, the international portfolios did even better over longer performance windows implying consistency in performance and further validating our rules-based GARP stock selection.

In the past 3-year period (January 2022 through 2024):

  • 37 of the 42 MarketGrader International Indexes finished in the top half of their actively managed peer groups.
  • 30 were in the top quarter of their active peers, and
  • 27 MarketGrader International Indexes finished in the top 10% of their peer groups.

Extending the comparison window over 5 years (January 2020 through December 2024), we find that:

  • 40 of the 42 MarketGrader International Indexes were in the top 50%, meaning they beat more than 50% of their active peers.
  • 39 were in the top 25%, beating over 75% of their active peers.
  • 34 MarketGrader International Indexes finished in the top 10%, beating more than 90% of their active fund category peers.

Some notable outperformers among MarketGrader’s non-U.S. Indexes include:

The MarketGrader Europe 100 Index finished in the second percentile of the Developed EU Large Cap Core universe (585 managers), which is great but not as good as leading the category, which it does over both 3- and 5-years.

The small cap MarketGrader Europe 200 Index managed to beat all 119 of its active peers in 2024, improving on its 2nd percentile 3-year result, and keeping pace with its category leadership  over 5 years (topping all 107 actively managed funds).

Narrowing in on specific countries, MarketGrader’s UK 50 Index (MCW and EW versions)—which selects the top scoring stocks among UK’s large caps—finished 3rd percentile, maintaining top decile rankings against active peers over 3-years, while besting all funds over 5-years. With certain prominent strategists believing the UK large cap space represents the trade of the decade, investors should consider following MarketGrader’s GARP + Quality approach to stock selection as the UK economy continues to weaken, which could hit corporate profits in coming years, muting the appeal of the country’s equity valuations.

MarketGrader’s Japan 100 Index finished top quartile among 177 Japanese Large Cap Core funds, not quite as good as its outperformance over 3-years (6th percentile) and standing atop the category over 5-years (1st percentile).

A similar pattern is seen in the performance of MarketGrader’s Australia Large Cap 30 Index, with top 5th percentile performance in 2024 (out of 247 managers), 2nd percentile over 5-years and 3rd percentile over 5-years. And it should be noted that MarketGrader’s market cap weighted version tops all funds in the category over 5-years.

Looking to our northerly neighbors, we see more top-of category outperformance of active peers for the MarketGrader Canada Large Cap 40 Index (3rd percentile over the 5-year period out of 224 funds) and the MarketGrader Small Cap 60 Index (6th percentile also over 5 years).

Income investors looking abroad might want to note the power of combining a fundamental focus on GARP + Quality with favorable income characteristics. The MarketGrader Developed Markets ex-US Income 100 Index topped all managers in the DM ex-US Income – Core category over the 1-, 3- and 5-year windows. The MarketGrader Australia Income 30 Index also has an incredible performance record, leading its 30+ peers in Australia’s Equity Income category.

MarketGrader’s six EM Indexes had a near perfect track record leading the 370 active managers across 5 years (only the MarketGrader EM Country-Capped 100 Index was in the 2nd percentile over the mid-term window).

As investors reconsider their international equity allocations, they should also consider a paradigm shift and move beyond the benchmarks that have failed to deliver any significant returns in a decade. Furthermore, while active managers claim better performance overseas under the premise of “less efficient markets” (to which we do not subscribe), we believe that a disciplined, rules-based approach to stock selection focused on buying great growth companies at reasonable prices works as well, if not better, than it does in U.S. equities. Said differently, when investing in equities outside the U.S., it could be time to look past active managers to MarketGrader’s GARP + Quality stock selection smart beta index lineup.


[1] Performance for all actively managed funds was gross of fees, providing a fair comparison against MarketGrader Indexes, which don’t have management fees nor trading costs.

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