3 International ETFs That Could Outperform the S&P 500 This Year

International equities have outperformed the US YTD through mid-March: VXUS +4% YTD and ~26% over the past 12 months (assets $110.9B, 0.05% expense), FENI +4% YTD and +27% 12 months (0.28% expense, +61% since Nov 2023 inception), and FIDI +6.6% YTD and +30% 12 months with a 3.9% yield (0.19% expense, $212M AUM, 56% Europe, 34% financials). Macro drivers cited are Germany/Europe fiscal expansion into defense and infrastructure, questions around dollar strength, and relatively elevated US valuations, supporting a renewed international rotation but creating region and factor concentration risks. Key investor considerations: VXUS = broad low-cost ex-US exposure including emerging markets; FENI = developed-market factor-tilt with modest active fee; FIDI = income-focused, Europe- and financials-heavy exposure with smaller AUM and higher concentration risk.

Analysis

European cash-flow heavy sectors (utilities, staples, majors in mining and tobacco) are positioned to capture an environment where policy-driven fiscal impulse and higher local yields persist; their capital intensity and visible free cash flow make them natural recipients of re-rating as domestic discount rates normalize lower versus US peers. A less obvious winner is continental banks: a steeper local curve increases net interest margins quickly, but the gain is non-linear — banks with shorter-duration liabilities and cleaner legacy loan books will compound ROE materially within 2-4 quarters while weaker peers face provisioning shocks.

Second-order supply-chain effects matter. Sustained European infrastructure and defense demand will reorient commodity baskets (steel, copper, rare earths) and favor miners with European port access or long-term offtake agreements; conversely, specialized electronics and aerospace suppliers may see order front-loading that tightens lead times and pushes margins to OEMs with scale. Currency is the governor: a re-accelerating dollar would clip multinational re-rates and amplify capital outflows from smaller international ETFs — liquidity and tracking risk show up first in sub-$1bn funds.

Key risks and timing: the fastest reversals come from rate and FX moves (days–weeks) while fiscal-to-capex transmission plays out over quarters to 18 months. Political tail risks (national elections, coalition breakups) or a sudden credit event in an EU periphery market could reverse positioning quickly. Practically, use 3–12 month horizons for positioning, and keep 5–10% portfolio-level shock liquidity to buy dislocations if fiscal delivery misses expectations.

Key Decisions for Investors

• Long RIO (Rio Tinto) — buy a 3–6 month position size 2–4% of equity book. Target +20% on commodity re-rating and infrastructure restocking; hard stop -10% or hedge with 3–6 month 10% OTM puts to limit drawdown to ~8%.
• Long NGG (National Grid) via buy-and-hold with covered-call overlay — 6–12 month time horizon. Aim for ~12–15% total return (price + option income) versus downside of ~8% if regulatory or FX headwinds surface; roll calls monthly to monetize high-probability range-bound outcome.
• Long BTI (British American Tobacco) with protective puts — 9–12 month horizon. Position size 1–3% as a defensive cash-flow anchor; target +15% vs max drawdown ~12% (put cost caps tail risk).
• Relative-value pair: long FENI (factor-tilted developed international exposure) vs short SPY (US large-cap) — re-rate trade over 3–9 months. Allocate equal notional; expect 6–12% relative outperformance if international valuation catch-up continues; risk is US multiple expansion which could produce an 8–10% adverse swing, so use 2% portfolio sizing and 6% stop-loss on the pair.