The active advantage abroad: The case for international ETFs

The U.S. has long been the star of many portfolios, but depth wins championships—and in investing, depth means diversification. International equity ETFs are stepping into a bigger role, offering complementary sources of growth and resilience amid shifting global dynamics. Record fund flows in 2025, with strong momentum into 2026, underscore rising demand for diversification, attractive valuations and improving fundamentals outside the U.S. This piece explores:

• Drivers behind the recent flows into international equity ETFs
• The evolving landscape of active versus passive international strategies
• Why international equity ETFs are becoming a core component for enhancing long-term outcomes

Flows into international ETFs

International markets have been a clear standout in 2026, extending momentum that began in the second half of 2025. The move has been supported by diversification benefits, a weakening U.S. dollar, improving relative performance and a renewed demand for growth beyond the U.S., as investors aim to broaden exposure across different cycles, sectors and regions. Many U.S. indices now sit at or around record concentration, while international markets can broaden diversification and provide lower concentrations and more attractive valuations.

Through February, international equities have attracted $105 billion in inflows, outpacing the $55 billion into U.S. equities. This builds on a strong 2025 in which international ETF flows reached $220 billion, a 126% year-over-year increase.ⁱ While flows are not a guarantee of future returns, they often signal a reassessment of opportunity sets and portfolio construction priorities.

Making the case for active within international investing

Active ETFs are gaining traction in international markets. Over the past 12 months, 73% of newly launched international ETFs have been active. Five years ago, in 2021, active international ETFs drew just 3.5% of flows, whereas this year they account for 20%, highlighting rising demand for flexible strategies that can adapt to global market dynamics.ⁱⁱ Active ETFs allow managers to navigate diverse markets, address currency and governance risks and seek alpha through selective country, sector and security positioning. The median active manager outperformed the benchmark, net of a 0.45% annual fee hurdle, in 74% of rolling three-year periods over the past 20 years.ⁱⁱⁱ Some limitations to passive investing include:

• Concentration in mega caps and dominant sectors or countries
• Skews and gaps from index construction, including limited small cap or frontier coverage and governance differences
• Limited flexibility to avoid bubbles or respond to regime shifts
• Implementation frictions, such as tracking error, replication and liquidity constraints, rebalancing and trading costs and securities lending risks

Passive efficiently delivers beta, but these factors can matter when leadership narrows or macro conditions shift. 

International equity in a portfolio context

Many still frame international equities as a simple split between developed and emerging markets. In practice the opportunity set is much broader. Investors can combine style tilts such as growth and value with regional or single country exposures, add thematic and sector strategies tied to long-term trends and choose whether or not to hedge currency exposure. These choices can meaningfully impact diversification, volatility and returns.

Years of U.S. outperformance have left many portfolios home biased and underweight to international markets, but selective non-U.S. allocations can strengthen risk-adjusted profiles. Over the trailing three years, adding a 10% sleeve of international value to a traditional 60/40 U.S. mix increased the Sharpe ratio from 1.15 to 1.23 and modestly reduced volatility. A similar 10% allocation to emerging markets, often viewed as more volatile and risky, also improved risk-adjusted returns, raising the Sharpe ratio to 1.19 and lowering volatility through diversification.ⁱᵛ

International equities set to extend leadership

International equities offer a durable opportunity set with attractive relative valuations, improving earnings breadth across both developed and select emerging markets, and sector composition aligned with global investment cycles in industrials, energy transition and reconfigured supply chains. Recent international outperformance appears sustainable, as currency stabilization, fiscal stimulus, shareholder friendly policies and AI should all provide tailwinds. Dispersion does remain elevated and leadership is narrowing, creating a fertile ground for stock selection and country tilts that active ETFs are well positioned to capture. Active ETFs use flexible risk management to navigate governance and currency differences, lean into improving fundamentals and avoid index-heavy concentrations while preserving the liquidity and tax efficiency of the ETF wrapper.