A new year is here and Bull vs. Bear is back! VettaFi writers Nick Wodeshick and Nick Peters-Golden discuss whether foreign equities can repeat their strong 2025 in 2026.
Nick Peters-Golden: Hi Nick! Thanks for joining me for this chat today. I am a frequent advocate for foreign equities to diversify portfolios, but I’m going to be playing the bear today. I don’t see ex-U.S. equities having as good a year this year as last. What say you?
Nick Wodeshick: Hey Nick! Thank you for taking the time to talk foreign equities today. Though we’re still very early into the new year, I’m feeling that 2026 is going to continue to be a favorable year for many of the international strategies that saw success last year. Let’s take a closer look.
Peters-Golden: Here’s why I think this year is going to see foreign equities fall off a bit. First and foremost, last year is just a tough act to follow. There are a lot of different metrics to assess foreign equities performance last year, so let’s get a better sense of what we’re talking about here.
Starting with the broad ex-U.S. equities segment, the S&P World ex-U.S. Index had a 34.5% one-year return as of January 9. Broad ex-U.S. foreign equities aren’t the only way to look at foreign equities, however. ETFs that focus on emerging markets or developed markets equities also deserve consideration when assessing just how well non-U.S. markets did last year.
The KraneShares Emerging Markets Consumer Technology Index ETF (KEMQ), for example, returned 56.2% in 2025. The Avantis International Small Cap Value ETF (AVDV) returned 49.4% last year. Meanwhile, the VanEck Africa Index (AFK) returned a whopping 74.7% in 2025, focusing entirely on equities from companies active in Africa.
I argue that that’s going to be tough to follow for each of those ETFs, and for basically any fund investing outside the U.S. It’s going to be even “harder” to outdo these red-hot AI hyperscalers and megacap tech names. A lot of the investor interest in these foreign equities was for diversification amid tariff and concentration risk concern.
Tariffs are in the rearview mirror now, and I would argue that last year’s foreign equities move likely sufficiently addressed much of that concentration risk for a lot of investors. You don’t actually want to drop your exposure to the Nvidias (NVDA) and Googles (GOOGL) doing that AI work. Are they very hot right now, perhaps dangerously so, waiting to deliver profit? Yes. But they’ve still got space to grow. They’ve borrowed a ton, and revenues have yet to really accelerate. However, I think they outperform foreign equities this year.
Wodeshick: I definitely think it’s fair to point out that many of these funds did extremely well last year — and any questions over how sustainable this rally is are always going to be valid. However, I believe it’s equally as important to look at the conditions that are driving the rallies in the first place. In truth, many of the factors that caused a pivot towards international equities in 2025 are still in effect today.
Part of the international rally came from investors looking to move away from U.S. equities, due to uncertainty over where the country’s economy was heading. Fortunately for international strategies, the uncertainty around which direction the U.S. economy will head is still present.
For example, the December jobs report capped off a rather unimpressive year for the U.S. job market, with only 50,000 jobs being added for the month. This came in below FactSet expectations, and left 2025’s job growth at the lowest level in five years. These kinds of problems are not ones that are exactly solved overnight. Even if the job market improves in 2026, it’s going to take a while for conditions to ramp up to a favorable spot.
Furthermore, this spotty job data could play a role in affecting the timing and placement of future rate cuts from the Federal Reserve. Of course, these rate cut doubts are compounded by upcoming shifting leadership positions at the Fed, as well.
When uncertainty is at the forefront of any discussion, diversification gains more value. Of course, one of the tried-and-tested ways to build a diversified equity portfolio while limiting exposure to the U.S. is through bolstered international exposure.
Diversification through the international markets can come from a few different places, too. Developed markets are offering strong opportunity sets as of late, but so are emerging markets. Better yet, investing in both kinds of markets can provide very different types of country exposures, fostering an even more diversified portfolio.
Peters-Golden: Let’s dig a little deeper on this one. What are we really talking about when we talk about foreign equities, and what segments could reasonably be seen as matching their performance once more?
I want to start with precious metals and materials. A big reason why AFK did so well last year was that it has a big focus on mining things like gold and various other precious metals. So let’s break that down. The ETF invests in stocks like Endeavour Mining Plc (EDV), which operates gold mines in West Africa.
Gold benefitted from concern around the U.S. dollar, which does continue, but can it “beat” last year? I don’t think so. The first year of the Trump administration introduced a lot of doubt into U.S. debt markets. 2026 will likely add more, but “as much?” Yes, gold producer margins are very efficient right now, but can they get “more” efficient? I doubt it. Copper and other tech metals will also drive miners worldwide, but why not invest in “global” indexes that include U.S. miners as well to get that exposure?
Europe also delivered last year, so what is the outlook for the continent in 2026? While many foreign equities segments did really well last year, astute observers will note that a big chunk of that was in the first half. In the second half, European equities trailed U.S. equities.
Digging in a bit more into Morgan Stanley’s outlook for the region, the firm’s own analysts see much less growth for Europe than the consensus sees, based on slower earnings growth. The key question for Europe is whether the continent can overcome debt challenges and other so-called “structural” issues with the cyclical growth it’s seeing. That may prove tough.
Finally, the regions that don’t rely so overwhelmingly on metals alone deserve a look. Ongoing issues are slowing China down, yes, but what of south and southeast Asia? Every year, investors hope India’s burgeoning middle class finally delivers, but even as a bright spot, a U.N. report projects slowing growth for the massive country in 2026 compared to 2025.
Wodeshick: I agree that betting specifically on international metals isn’t necessarily the best path forward, especially with recent U.S. policy moves in favor of a more rigorous domestic supply chain for that sector. However, one of the best parts about international investing is how broad the opportunity set is. For instance, one can look to invest internationally to take advantage of some of the momentum that we’re seeing with individual countries, such as Japan, Germany, and others.
Alternatively, advisors and investors may look to international stocks as a way to tackle growth in the AI space in a diversified manner. AI momentum isn’t just limited to U.S. companies, after all — DeepSeek should be proof enough that there’s reason for investors to look beyond our borders in that regard. Furthermore, as the AI buildout continues and more data centers and infrastructure sites pop up around the world, plenty of different global companies and sectors can benefit.
AI stocks aren’t the only ones worth keeping an eye on, either. The defense sector also remains in a good position, buoyed by NATO members promising to amplify spending on defense and defense-related infrastructure. This can play out well for defense contractors, but also the infrastructure and tech sectors as well.
With so many opportunities in the international space ripe for the picking, a diversified international ETF can offer plenty of reward while minimizing the risk. One such fund is the American Century Quality Diversified International ETF (QINT).
Looking at how QINT goes about building international exposure can help explain what I’m talking about. The fund invests in both large- and midcaps outside the U.S. with strong fundamentals.
Crucially, the fund offers significant sector diversification. As of December 31, 2025, the fund does not have a sector with more than 21% weight within its portfolio. The same holds true for its countries as well: Japan is the largest holding at 19%, as of December 31, 2026, but the remaining portfolio is extremely well-diversified. This allows the fund to tackle the different opportunity sets in the international space, without being beholden to them.
Looking under the hood of funds like QINT showcases the advantages of international investing in general. There’s so many ways to go about doing so, both to reap the rewards while avoiding the greater risks. Strategies like this saw good success in 2025. QINT was up 38.02% year-to-date as of December 31, 2025. I expect strategies like this to continue to see success this year.
Peters-Golden: It’s a chaotic world out there. 2026 may be even more so when it comes to geopolitical risk. Geopolitical risk looms over the whole world, perhaps more dramatically than it has in decades. On every continent, except, perhaps, in Oceania, political power and conflict threaten markets and people. While last year, those tensions spared and in some ways drove market growth, this year, foreign equities may not be so lucky.
Just recently, we saw the U.S. attack Venezuela and overnight decapitate its government. The country has a long history of intervention in South and Central America and could easily destabilize the region further with little warning, throwing markets into disarray.
Even more risky to global markets may be further Russian aggression in Europe. The war in Ukraine has already gone on for years and continues to destabilize the region, but just as suddenly as that happened, Russia could attack the Baltics or ships in the Black Sea. Key markets in Poland and Turkey are just nearby, not to mention how an attack on a NATO member could spiral out of control.
Perhaps the single biggest geopolitical risk to markets, foreign and domestic, is a Chinese invasion of Taiwan. Taiwan houses companies critical to global tech supply chains; an invasion would obviously disrupt those supply chains precipitously and potentially spiral into a broader, regional conflict. The U.S. attack on Venezuela has potentially emboldened China to take that next step.
As such, I believe that investors would be wise to be cautious with foreign equities, and I would suggest a neutral position for this year, avoiding overweight exposure. As I said at the start, I favor diversification into foreign equities. But should you add more this year or expect them to outperform 2025? I have my doubts.
Wodeshick: Sure, geopolitical tensions are a fair reason for some to balk at staying the course with the international market. However, investors tend to overestimate how much the geopolitical risks will affect the stock market.
Take China, for example. Many thought that ongoing tensions between the U.S. and China throughout 2025 would knock the wind out of the country’s economy. However, China has proven time and again to have the flexibility to adapt and work around U.S. tariffs when needed.
I wouldn’t argue that China’s efforts to negate the impacts of tariffs are a foolproof system, per se. Just that the country is no stranger to U.S. tariffs at this point, and knows how to employ fiscal stimulus to keep its domestic efforts going.
In 2025, there were still plenty of good things happening for the China market, too. In particular, DeepSeek stood out as a peak performer, shocking global markets due to its cost-efficient AI large language model. DeepSeek’s success caused many advisors and investors to give China’s tech and internet sectors a closer look, as the country offered more opportunities than previously expected.
Looking ahead, China’s investor base has plenty to be excited for. This year will mark the release of a new five-year plan for the country. The 2026 China Outlook from KraneShares notes that this five-year plan is anticipated to bolster the tech industry, along with stimulus for domestic operations.
The five-year plan isn’t the only stimulus that China’s market might see this year, either. If the U.S. diplomatic visit to China in April goes well, the China market could see a series of positive ripple effects. This could include more favorable trade conditions, a better investment narrative for Chinese companies, or some combination of both.
Putting this all together, situations like China are why it’s important for investors to not overcorrect when geopolitical tensions arise. Oftentimes, those who choose to buy-and-hold their exposure to countries like China are those who get to reap the most benefit when the country starts to see positive momentum.
Regardless, we’re still very early into the year, and I’m very much interested in seeing how the international markets play out in 2026. Nick, it’s been a pleasure chatting with you!
Peters-Golden: Likewise, Nick! We’ll see what the new year holds — excited for Bull vs. Bear to be back in action.
VettaFi LLC (“VettaFi”) is the index provider for QINT, for which it receives an index licensing fee. However, QINT is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of QINT.
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