Despite the stunning comeback in the U.S. stock market from early April lows, investors have poured millions into international ETFs. Vanguard Total International Stock ETF (VXUS Quick QuoteVXUS - Free Report) and Avantis Emerging Markets Equity ETF (AVEM Quick QuoteAVEM - Free Report) saw solid inflows of $11.7 billion and $1.1 billion, respectively, in just one month. Investors should note that VXUS has not seen a single day of outflows in the past 52 weeks and has gathered $11.7 billion in capital in a year. 

This trend reflects a broader shift in investor sentiment, driven by a combination of macroeconomic factors, geopolitical developments and market dynamics.

What’s Driving Interest in International ETFs?

U.S. Market Volatility: The U.S. stock market is still grappling with a host of challenges, including credit downgrades, persistent inflation and trade tensions (read: Moody's Downgrades U.S. Rating: What's Next for S&P 500 ETFs?). 

Attractive Valuations: After more than a decade of U.S. stock market outperformance, valuations between U.S. and international stocks have reached historically wide gaps. International equities, particularly in Europe and emerging markets, are currently trading at more attractive valuations compared to their U.S. counterparts. For instance, the MSCI EAFE Index, which tracks developed markets outside the United States, has a forward P/E ratio of 14.8, nearly 20% cheaper than 18.5 for the S&P 500 Index.

Emerging markets have also shown resilience, with the MSCI Emerging Markets ex-China index surging 20% in the past month. Factors such as a weakening U.S. dollar, stabilizing Treasury yields, and signs of economic recovery in countries like China, Korea, Taiwan, and Vietnam have contributed to this performance.

Currency Tailwinds: The weakening of the U.S. dollar has made international investments more appealing. A weaker dollar enhances the returns of foreign assets when converted back to U.S. currency, providing an additional incentive for investors to diversify internationally.

Aggressive Government Stimulus Abroad: Fiscal policy is another major factor. Europe has implemented fiscal stimulus measures. Germany recently unveiled a €500 billion infrastructure package aimed at bolstering economic growth, while China has ramped up fiscal support to stabilize its economy. In contrast, the United States has taken a different approach as it is grappling with inflation and fiscal challenges (read: Europe Investing Gains Wall Street Favor: Time to Jump Into ETFs?).

ETFs in Focus

Vanguard Total International Stock ETF (VXUS Quick QuoteVXUS - Free Report)

Vanguard Total International Stock ETF offers exposure to companies located in developed and emerging markets, excluding the United States. It follows the FTSE Global All Cap ex US Index and holds a broad basket of 8,576 stocks with key holdings in financials, industrials, technology and consumer discretionary. Japan, the United Kingdom and China are the top three countries.

With AUM of $90.9 billion, Vanguard Total International Stock ETF charges 5 bps in fees per year from investors and trades in an average daily volume of 4 million shares.

Avantis Emerging Markets Equity ETF (AVEM Quick QuoteAVEM - Free Report)

Avantis Emerging Markets Equity ETF invests in a broad set of companies of all market capitalizations across emerging market countries and is designed to increase expected returns by overweighting securities believed to be trading at lower valuations with higher profitability ratios. It holds a broad basket of 3,530 stocks with key holdings in financials, information technology and consumer discretionary. From a country look, China takes the largest share at 27%, followed by India (20%), Taiwan (20%) and South Korea (11%) (read: Should You Buy the Dip in India ETFs Amid Pakistan Tensions?).

Avantis Emerging Markets Equity ETF has AUM of $9.7 billion and charges 33 bps in annual fees. It trades in volume of more than 1 million shares.