International Diversification Is Finally Paying Off

Non-US stocks, especially those from developed markets, have been disappointing diversifiers for US equities over the past decade. Moreover, investing overseas has often detracted from returns for US-based investors. In seven of the 10 calendar years from 2016 through 2025, the Morningstar Global Markets ex-US Index lagged the Morningstar US Market Index, often by wide margins.

Non-US stocks held up better than US stocks during the 2022 bear market, however, and they really surged in 2025. The dollar’s weakness relative to other major foreign currencies was a significant factor in foreign stocks’ outperformance last year. The Morningstar Global Markets ex-US Index gained 32% versus an 18% gain for the Morningstar US Market Index. The strength in nondollar assets has continued in 2026, too.

A Diversification Benefit … At Last

From a diversification perspective, most international stock benchmarks, especially those in developed markets, have been closely tied to the US market over the past three years. However, those correlations declined in 2025, especially for developed markets. While the Morningstar Developed Markets ex-US Index had a 0.92 correlation with US stocks over the three-year period ended in 2022, for example, it was 0.71 at the end of 2025. Meanwhile, emerging-market stocks have tended to have lower correlations with US stocks than those from developed markets, largely because of China’s big presence in emerging-market indexes, emerging markets’ different sector profiles, and the fact that emerging markets often respond as much to local business conditions and idiosyncratic geopolitical events as they do to global economic conditions. Those correlations have generally trended down since 2000.

The decline in the dollar’s value has contributed to non-US stocks’ lower correlations recently, and it has been responsible for previous periods of divergent performance, such as from 2004 through 2008. If the greenback goes into a longer-term slump or if the US sinks into recession but other major non-US markets manage to avoid one, it is conceivable that correlations between US and international markets could continue to drift lower.

Longer-term correlations also demonstrate that emerging markets generally have a lower correlation with US stocks than developed markets do. That’s because the types of industries that are especially prominent in emerging markets, particularly energy and basic materials, have declined as a percentage of the US market. In addition, China, which accounts for roughly one-fourth of major emerging-market indexes, follows a different economic cycle than the US. Finally, emerging markets are more likely than developed markets to be affected by country- and region-specific geopolitical events—political instability, wars, and currency devaluations—that have little to do with the US. Taken together, those features suggest that emerging-market equities’ low correlation with US stocks won’t be as fleeting as some of the other correlation trends.

Non-US value stocks have also offered decent diversification benefits relative to US equities. For example, the trailing three-year correlation of the Morningstar Global ex-US Value Index is 0.63 with the Morningstar US Market Index, whereas it’s 0.74 for the broad Morningstar Global ex-US Index. The sector composition of the Morningstar Global ex-US Value Index explains the difference: It holds just 6% in healthcare and 8% in technology, whereas the Morningstar US Market Index holds 10% and 33%, respectively, in those two sectors. Performance of the Morningstar Global ex-US Value Index has also been better than that of the broad-based Morningstar Global ex-US index over the past decade, though that pattern could easily reverse.

What It Means for Your Portfolio

While investors who have diversified internationally haven’t benefited much over the past decade (at least until recently), their portfolios have been slightly less volatile relative to a US-only portfolio. The 10- year standard deviation of the Morningstar US Market Index is 15.4, whereas the standard deviation of the Morningstar Global Markets Index, which includes both US and non-US names, is 14.4. Japan, in particular, has exhibited milder volatility than the US market and other major non-US markets.

Moreover, the US market has become increasingly growth-tilted: A third of the Morningstar US Market Index landed in the technology sector at the end of 2025, for example, whereas just 16% of the Morningstar Global Markets ex-US Index does. A hefty weighting in tech stocks has been a boon for US-only investors as technology names have soared for most of the past decade. But in a period when lower-priced stocks from traditional value sectors lead the way, non-US stocks could outperform and help diversify US exposure. Because emerging markets have generally had a lower correlation with the US equity market than developed markets, investors seeking diversification may want to make sure their foreign-stock allocation includes at least some exposure to less-developed markets. And while some specific regions have been better portfolio diversifiers than others, most investors will probably want to shy away from investment vehicles that focus solely on a particular geographic region, as it’s often duplicative with other holdings in their portfolios, and regions can be volatile on a stand-alone basis.

In a similar vein, growth-leaning core and international indexes tend to have a tighter correlation with US stocks than non-US value indexes. Thus, for investors looking to non-US stocks for diversification from US equities, emphasizing value names overseas while downplaying growth appears to be a reasonable way to go.