When the rest of the world led

International vs US, 2003 to 2008

US investors have spent fifteen years watching international allocations lag, to the point where many have abandoned them. This five-year window is the mirror image, and it is worth seeing before concluding that the recent pattern is permanent.

By Kevin WinmillUpdated September 9, 20264 min read

#What this plan actually returned

These are real results, not estimates. We ran $10,000 up front plus $500 a month from January 1, 2003 to January 1, 2008 (5.0 years), with dividends reinvested, against actual daily closing prices for each fund.

Dollar-cost averaging backtest results for EFA and VTI from 2003-01-01 to 2008-01-01
Ticker	Invested	Final value	Total return	Ann. return	Worst drop
EFA	$40,000	$72,948	+82.37%	+19.76%	-15.76%
VTI	$40,000	$57,709	+44.27%	+11.96%	-13.19%

Ann. return is the internal rate of return (IRR), which accounts for how long each individual contribution was invested, so it is lower than the headline total return on a plan that kept adding money. Worst drop is the deepest peak-to-trough decline in the fund itself during this window, measured on daily closes.

Pre-tax and excluding brokerage commissions. See How It Works for the full methodology, or re-run this exact comparison with your own numbers.

EFAVTIMoney you put in

Portfolio value over the full simulation for EFA and VTI, with the dashed line showing total contributions to date. The gap between a line and the dashed line is that position's gain.

#International won, decisively

On identical contributions of $40,000, EFA finished at roughly $73,000 and VTI at roughly $58,000. In annualized terms that is about 19.8 percent against 12.0 percent, a gap of nearly eight percentage points a year.

For context, the 2016 to today comparison shows the US ahead by a bit over four points annually. This window shows international ahead by nearly twice that margin. Anyone whose view of international diversification was formed entirely after 2010 is working from half the record.

#What actually drove it

Three things compounded together, and only one of them was about foreign companies outperforming American ones.

A weakening dollar. The dollar declined substantially against major currencies across this period. Because EFA reports in dollars, that decline added directly to returns for a US investor, independent of how the underlying stocks performed locally.
Recovery from a deeper starting point. The window opens in January 2003, near the bottom of the bear market that followed the dot-com crash. Non-US markets had in many cases fallen further, so they rebounded from a lower base.
The commodity and emerging-market cycle. The mid-2000s expansion was driven substantially by industrial demand, benefiting resource-heavy and export-oriented economies more than the US market.

The currency component deserves particular attention because it reverses. The same dollar effect that added to international returns from 2003 to 2008 subtracted from them across much of the following decade, as the dollar strengthened. A meaningful share of both results is a currency story rather than a corporate performance story.

#The drawdown column is a warning about the window

Both funds show unusually shallow worst-case declines here: about 16 percent for EFA and about 13 percent for VTI. Those are small numbers by equity standards, and they exist because the window was chosen to end before the crisis.

The simulation stops on January 1, 2008. The financial crisis began in earnest later that year, and international equities, particularly European financials and emerging markets, fell harder than the US market did during it. Extending this window by even one year changes the ranking substantially.

That is stated plainly because it would be easy to present this page as evidence that international exposure is both higher returning and lower risk. Over this specific window it was. Over a window ending eighteen months later it was neither.

#Why EFA rather than VXUS

VXUS, the fund most investors hold today for international exposure, did not launch until 2011 and cannot be tested against this period at all. EFA (iShares MSCI EAFE ETF) has traded since 2001 and is the practical choice for any backtest reaching into the 2000s.

They are not identical. EFA covers developed markets in Europe, Australasia, and the Far East, and holds no emerging markets. VXUS includes emerging markets and Canada alongside developed ones. Since emerging markets performed strongly during this particular window, a VXUS-equivalent portfolio would likely have done somewhat better than the EFA figure shown here, not worse.

#What to test

Extend the end date to January 2010 and watch the ranking narrow sharply as the crisis enters the window.
Run 2003 to today as one continuous window. Across the full period the two are far closer than either five or ten year snapshot suggests.
Run this window and the 2016 to today window back to back. Together they are the argument for holding both rather than choosing.
Add VT, the total world fund, to see what the market-cap-weighted blend of the two actually produced.

This window was selected because it favors international exposure, exactly as the last decade’s windows favor the US. Choosing an allocation by whichever region won the window you happened to look at is the error described in why backtests can mislead you.

Change the contribution amount, schedule, or date range and re-run this comparison against the same historical data.

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← All comparisons See the same comparison over the last decade, reversed →