International stocks are finally making a comeback, and the Vanguard FTSE Developed Markets ETF (VEA) is a great way to get in on the action. Over the past year, VEA has returned 34% compared to the S&P 500's 27%, and year-to-date VEA is up 12% versus 8% for the SPDR S&P 500 ETF Trust (SPY). This is a significant shift from the past decade, when owning anything outside the S&P 500 felt like a risky move. But what's driving this change? Well, it's a combination of factors. European and Japanese equities started the year trading at a wide valuation discount to U.S. large caps, a gap that historically mean-reverts. Then, fiscal expansion abroad, particularly in Germany and Japan, while U.S. policy turned restrictive on tariffs and immigration, provided a much-needed boost. And let's not forget the softer dollar, which mechanically boosts returns on foreign equities held by U.S. investors, compounding the underlying earnings story. But what exactly is VEA? It tracks the FTSE Developed All Cap ex US Index, which includes roughly 4,000 stocks across Europe, developed Asia, Canada, and Australia. The fund leans heavily on Japanese industrials and consumer names, European banks and luxury, Swiss healthcare, and Australian miners. Top holdings include ASML, Nestle, Novo Nordisk, SAP, and Toyota, global franchises most U.S. investors use but rarely own directly. And the best part? The expense ratio is 0.03%, among the cheapest diversified equity funds ever offered. Yield runs around 3% on trailing distributions, well above the S&P 500's payout, because European and Japanese companies return more cash through dividends and less through buybacks. But VEA is not without its trade-offs. It's unhedged, so a dollar rally would claw back some of the gains foreign earnings deliver. It also has a heavier sector mix on financials and industrials, lighter on tech, which means it will lag if the next leg of the AI capex cycle reaccelerates U.S. mega-cap earnings. And there's tax complexity on dividends, with foreign withholding taxes partially recoverable in taxable accounts via the foreign tax credit, but the paperwork is real, and the credit is lost entirely inside an IRA. So, who should consider VEA? If your portfolio is built around an S&P 500 or total U.S. market core, VEA is a great way to round out developed-market equity exposure at a cost so low it barely registers. But if you genuinely believe U.S. exceptionalism is permanent and structural, then VEA might not be the best fit for you.
