International stocks are on a tear this year. For nearly a decade and a half, the S&P 500 of U.S. companies has clobbered foreign stocks by more than double. So far in 2025, the tables have turned with the Morningstar Global Markets non-U.S. index eclipsing the S&P by the same margin.
The reversal serves as a reminder that diversification across markets and asset classes is important since one can never foresee the next bend in the road. Yet many domestic investors are under exposed to foreign markets and have missed out on the rotation. It’s not too late, and it is easier than ever to gain access to international exposure.
Several factors have contributed to the relative domination of foreign equities over their U.S. counterparts. One major driver is the sharp decline in the dollar. The first half of the year witnessed the worst relative performance for the greenback since 1973, as many investors responded to disruptive trade policies and ballooning deficits by fleeing U.S. assets.
All else equal, a weaker dollar makes international stocks more attractive to U.S. investors due to currency translation. Profits from investments in euros or sterling are worth more dollars when the buck is weak. That is, every peso or yen buys more sawbucks as the profits are repatriated. Many analysts expect the decline to continue through the rest of the year as tariff roulette, surging debt and puerile presidential attacks on the Fed weigh erode the perception of U.S. stability.
While the falling dollar is juicing returns, foreign investments are also looking attractive due to valuations. U.S. stocks are expensive, and foreign stocks are cheap. According to Morningstar, the price to earnings ratio for U.S. equities is around 26 versus 16 for non-U.S. issues. Among the 10 largest stocks in domestic versus foreign markets, the discrepancy is massive: 34 times earnings for the largest U.S. stocks versus nine times earnings for the top 10 foreign companies. Yowza.
Add to these factors the evidence that the American economy is slowing. Real GDP growth for the first half of 2025 has averaged 1.2% at an annual rate, most of which can be attributed to massive investment in artificial intelligence. Strip out AI spending and the economy barely budged, consistent with the latest revised jobs report. A slowing economy eventually translates into lower corporate profits, weighing on stock prices even in the absence of a valuation bubble.
All of this to say international investing is having a party and many domestic investors are missing out on the fun. So how does a U.S. investor find their way to the dance floor?
For the average individual investor, the most efficient route to international diversification is through exchange traded funds or mutual funds rather than individual securities. Today there are hundreds of well-diversified and low cost ETFs that focus on non-U.S. equities.
For those who prefer to pick stocks and even for many professional fund managers, a type of security known as an American Depositary Receipt greatly simplifies the complicated process of international investing without the need for foreign brokerage accounts of the hassle of currency translation. In fact, many investors who own foreign companies like Nestle, Toyota and Sony don’t even realize they don’t own the stocks but a slip of paper that represents the stock.
While it is possible to invest directly in foreign companies on their own local stock exchanges, the process can be complicated and may involve setting up accounts on foreign exchanges. Today, American Depositary Receipts allow U.S. investors to purchase shares of international stocks in dollars during U.S. market hours according to American settlement terms and provide access to two thirds of all publicly traded companies in the major global markets.
In 1927, JP Morgan predecessor Guaranty Trust created the first American Depositary Receipt allowing U.S. investors to purchase shares of British retailer Selfridges on the New York Curb Exchange (later known as the AMEX). Today there are over 2,000 separate American Depositary Receipts tied to companies in 70 countries actively trading in the U.S.
An American Depositary Receipt is created when a large bank purchases a block of a company’s native shares on its own domestic exchange and holds them on deposit. Referred to as a depositary bank, this institution can then issue tradeable securities that represent the shares on deposit but can be bought and sold on U.S. exchanges just like American stocks. ADRs trade on the New York Stock Exchange, the NASDAQ and in the over the counter market.
The depositary bank establishes a ratio of depositary shares to underlying native shares to align the American Depositary Receipt price in a desirable target range on the U.S. exchange. For example, Toyota ADRs are issued at a 1:10 ratio, meaning each ADR represents 10 ordinary Toyota shares on the Tokyo exchange, while one ADR of BP equals six shares on the London exchange. Volkswagen, on the other hand, has a ratio of 10:1, meaning that there are 10 ADRs per individual share of VW stock on the Frankfurt exchange.
While ETFs and ADRs simplify access to international stocks without worrying about foreign exchange, they do not shield the investor from exchange rate risk. However, they do eliminate the need for the individual investor to convert the proceeds of sales back into dollars and allow investors to benefit from the tailwind of a sinking dollar. No fuss, no muss.
International diversification is important in building an all-weather portfolio, as returns this year have demonstrated. For most individual investors, picking individual foreign stocks is usually a loser’s game just like trying to beat the odds with U.S. stocks, and they are probably better off with a broad international ETF. But for the do-it-yourselfers interested in international diversification, ADRs are a convenient route to owning foreign assets.
Christopher A. Hopkins, CFA, is a co-founder of Apogee Wealth Partners in Chattanooga.