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The stock market has come full circle from its April lows, with all of the losses suffered now recovered. For investors who long defied warnings about being over-exposed to U.S. stocks, especially with the dominant position of a handful of tech stocks in the S&P 500, the rebound in portfolios is a good opportunity to do what many had neglected to do in the past: diversify into international equities and other asset classes.
"You got a gift from the market gods," said David Schassler, VanEck head of multi-asset solutions, on last week's "ETF Edge."
"We want to see people diversify, diversify internationally and into real assets as well, specifically gold and if you're into it, also diversify into bitcoin," he said.
Some investors already got the message early in 2025, as the period from January to April saw most major markets around the globe leave U.S. stocks behind in performance. Vanguard's Total International Stock Index ETF (VXUS), as an example, has net inflows of over $6 billion this year, according to ETFAction.com, which places it No. 11 among all ETFs in flows this year. But to put that into perspective, Vanguard's S&P 500 ETF (VOO), is now over $63 billion in inflows this year.
In fact, VOO is on pace to blow away the record for annual inflows it set just last year.
As investors who bought the dip in U.S. stocks are rewarded, ETF experts say those who have stuck with an S&P 500-heavy tilt and didn't enjoy the drawdown experience of April should still use this opportunity to look at portfolio balance. "If your portfolio is predominantly U.S. [stocks], we want to see you diversity in international as well as emerging markets," Schassler said.
Investing icons of the recent past, from Warren Buffett to Jack Bogle of Vanguard Group, broadcast a message that focusing on U.S. stocks over the long-term is the best bet. Bogle, in particular, often said the S&P 500's multi-national corporate makeup delivers plenty of overseas revenue itself. But even Buffett has been lightening up on some big U.S. market positions, while adding to more of his more recent bets on Japan.
"We're not anti-U.S., but just saying if you are predominantly invested in the U.S., you probably want to invest outside as well," Schassler said.
U.S. stock valuation remains concern as investors rush back in
Valuation in the S&P 500 remains a primary concern for experts who say this is a good time to make sure a portfolio is properly diversified. According to Schassler, with the recovery in stocks, the U.S. market is "priced richly."
He added that even as recession risks have declined after the U.S.-China temporary trade truce, the risks remain higher than the historical baseline. "We're not calling a recession, but risk is high," he said on "ETF Edge."
The price to earnings ratio in U.S. stocks reinforces the message that there is "lots of value overseas," he added.
In Schassler's view, the big shift in U.S. government policy on a global basis is also a secondary catalyst for more diversification. As the world becomes more bifurcated, and countries are forced to move forward on their own and push their own growth, investors are in a backdrop that favors more growth from lower valuation international stock markets, he said.
Todd Rosenbluth, head of research at VettaFi, said on "ETF Edge" that this year has shown more investors embracing international diversification, though he added that we are "not fully seeing it" in the market yet. He also says investors should use this moment to be mindful of the concentration within their U.S. stock holdings.
"The flows have certainly been favoring the U.S. and investors been buying the dip are being rewarded," Rosenbluth said. "We've seen growth equities rebound much more strongly, those tech and consumer discretionary oriented sectors," he said.
The iShares S&P 500 Growth ETF (IVW) is up nearly 18% in the past month, while the iShares S&P 500 Value ETF (IVE) is up about 8%, according to ETF Action.
IVW has a P/E ratio above 33, compared to a P/E ratio of 21.5 for IVE.
Rosenbluth says a good way to deal with the valuation and concentration risk within a U.S. portfolio is to invest in "quality" stock funds, such as offerings that seek to tweek growth and value more than in the S&P 500 as a whole, such as VictoryShares' Free Cash Flow ETFs.
"We might not see this rally continue on the growth side so you want to have balance in the portfolio," Rosenbluth said.
China, India and emerging markets
Both ETF experts said as global trade sentiment improves, investors should look at China and India as part of any international diversification plan.
Schassler said China is aggressively stimulating its economy, and India is one of the best growth stories in the world, "like China 20 years ago," he said. "Having China and India exposure makes sense," he said.
Rosenbluth said there was strong interest in China at the beginning of the year, and in ETFs such as KraneShares' CSI China Internet ETF (KWEB), but he described that momentum as now "faded."
KWEB is still a good option for investors interested in China in this environment, Rosenbluth said, because it is still one of the largest of the China-focused growth-oriented ETFs, and is less likely to be negatively impacted from China tariffs. It is a "China-only" story as opposed to a broader Chinese stock fund with exposure to multi-national businesses. KWEB is up 14% of the past month, and in the past week it saw close to $100 million in flows, compared to net outflows over $800 million during the prior three months, according to ETF Action.
On India, there are multiple options for investors, including the iShares MSCI India ETF (INDA), as well as Van Eck's Digital India ETF (DGIN).
Schassler said the structural growth story in India is the reason to invest. "You've got a huge population, it's tech savvy, well-educated, and the government is supporting the economy, so everything lines up there for a growth story," he said.
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