ETF Edge - International inflection point 8/24/26

Episode Date: August 24, 2026

International markets continue to outperform the U.S. but the gap is closing. Now, however, a range of variables could either widely reopen or completely shut that gap. Find out which is more likely.�� Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The EETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you're in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors.

I'm your host, Dominic Chu. The outperformance of international equities is at an inflection point. Here's my conversation with Josh Jones, portfolio manager, Boston Partners, along with David Bottset, the head of strategy innovation and stewardship over at Schwab Asset Management. I think international equities is the topic that we are going with today because we are seeing a lot more activity there as of late. And maybe I'll start kind of bigger picture with you, David, on just why we are seeing renewed interest in international stocks after such a prolonged period. where everybody focused strictly on U.S. stocks? You know, it's a great question, Dom, and you're right. So many investors have looked at U.S. stocks.

The strong performance of U.S. relative to international markets in 23 and 24 had many investors asking, why allocate to international? But we really saw that reversal in 2025. And many times when you see that reversal in performance, it can be quite stark and happen very suddenly. And that's what we saw in 2025 with international. greatly outperforming the U.S. markets, and that's really continued into 2026. As a result, we're saying far more flows into international index products.

Across the industry, we've seen over 90 billion into four and large blend products this year, and we're seeing that across the Schwab Asset Management products this year as well. Can you tell us, David, if I could follow up there, what exactly in your mind was the catalyst or set of catalysts that really got people in that kind of 2020? 23, 24 period into 2025 to focus more on international equities versus U.S. ones. You know, many times it starts with returns, but you then start to think about the benefits you get from international and diversification, whether that be the geographic business cycle or sector diversification, really starting to turn the page there. I think investors are

also starting to understand that so much of the trade in the U.S. has revolved around a few very narrow themes, started with the Meg 7, then we've got the semiconductors and the generative AI, that trade can be quite narrow. And we're starting to see the broadening out of positions and performance and having investors look at other segments of the market and other geographies in which they can capture those returns. You know, Josh, you're the portfolio manager on our little panel right now. So I guess maybe a good question to start off with to kick off the conversation with you is what it's been like to be a manager of international equity portfolios over the course of the past, say, five to seven years versus what it's like right now. What exactly

has been the difference, the change, the sentiment shift, or even your workload as an international PM? Yeah. So, I mean, with the way we look at the world, I mean, we're fundamental value investors at Boston partners. And I would say kind of post-pandemics of the last five or six years, the setup from a valuation and fundamental perspective has been incredibly attractive. So just, you know, much lower valuations than you get in the U.S. market, healthy earnings growth, healthy returns on capital. But for, you know, a good chunk of that period, investors didn't seem to care. And then kind of everyone woke up in 2025. And that's obviously kind of crossed with a period of dollar weakness. So, you know, I kind of look at history and the best periods for

international equities, at least from the perspective of U.S. investors, has been. been when you're generating good returns in local markets and then you're getting kind of a weak dollar environment translated back to, you know, U.S. dollars for, again, U.S. dollar investors. And I, you know, and that's clearly what kicked things off in 2025. In terms of kind of, you know, so everyone's kind of saying, all right, well, we've done really well for the last 18 months. Where do we go from here? And when we look at the markets, again, the valuations are still super attractive, fundamentals

are still really good. And that net kind of brings in what, you know, what happens to the dollar over time. And I, you know, at Boston Partners, we don't forecast the FX markets. But, you know, most of what it looks like to me is you trade off real rate differentials. Clearly with what we've seen, particularly just in the last week or so with the U.S. Treasury, desiring lower interest rates, you know, I think it would be reasonable to assume that over time we could see some period of dollar weakness. and that would continue to kind of help support returns to international equities, again, from a dollar investor's standpoint.

You know, Josh, you say that you don't really kind of forecast the FX side of things or the interest rate differential side of things as part of your fundamental analysis. But oftentimes in an unhedged portfolio, many of those returns are kind of there because of the currency appreciation in those local markets for those stocks that you're investing in versus a weakening U.S. dollar. So how much do you kind of look towards just the fundamental story for the stocks and their valuations in their local markets and what they should be at versus what you think a potential macro tailwind could be in terms of an improving economy and maybe by extension a strengthening currency in those local markets?

Yeah, so it's a great question. I mean, we start with the companies, right? So when we're looking at the companies, we're cross-referencing value, quality, business momentum. And so obviously, as part of that is earnings growth. And for a lot of these companies, depending on where they're generating revenues and generating earnings, you know, FX matters. So if you're a European company and you're generating a lot of your revenues and dollars, then a week dollar is bad for your earnings. So we have to incorporate FX as it relates to the companies. But again, ultimately, we're trying to build a portfolio of companies that are going to produce alpha over time. So at the starting point, you know, even if, if,

returns are not aided by a week dollar, at least our investors are hopefully getting out over time. That's our attempt. And then you get into these periods where the dollar is weak and you benefit from it. And during those periods, to your point, Dominic, you do have to pay attention to companies and where their revenue exposures are on the basis that, again, you know, if they are over indexed to U.S. revenues, that would actually then kind of dilute some of that benefit. Now, David, an important point about all of this as well is just where we are seeing the activity build. We know broadly speaking, there's been a lot more interest in international equities versus

U.S. on a relative basis. But from Schwab's standpoint and from where you can see the visibility that you have, are there certain areas of that international market that are garnering more attention than others? Are they maybe growth-oriented stocks that have the potential for tech-like returns? Are they more dividend-oriented strategies? Are there certain specific market caps on the spectrum that are more represented than others? Is it about maybe certain geography specifically? Are there places that you're seeing that kind of fund flow activity tell you a little bit more about just where the kind of more, I guess, nuanced interest is within that international trade? You know, there it is. So let's start with the developed markets. And we really look at the developed markets composed

was between large cap and small cap. And we're seeing much more interest in the large cap space in the developed markets. Our product SCHF, our international equity ETF, which focuses on large cap, we've seen significant flows there. It's a fund that's approaching $70 billion in assets. And flows have been over 12 billion since early 2024.

You compare that to our international developed small cap product, SCHC, also a broad based index product, but flows have not been as strong there. We think that what Josh was talking about, the strong fundamentals is largely playing out in the large cap space, these companies that have more ability to drive capital, drive investment,

and more diversification across their business lines than in the small cap space. You also mentioned dividends. With all the uncertainty in the market, whether it be inflation, geopolitical, commodity prices, You know, those trades can break down very quickly. We look at those companies with strong fundamentals, strong dividends with sustainability of dividends.

We're also seeing good flows in our international products. Product like the Schwab International dividend ETF, SCHY, is also seeing great flows. It's approaching $2.5 billion in assets and has really been garnering attention from investors because of the strong underlying fundamentals of the companies in the portfolio. Interesting, Josh.

I mean, it kind of makes sense a little bit. It's not too unlike the dynamics that we are seeing in the domestic U.S. market here with regard to some of the fundamentals underpinning the stock market here. From your perspective, as you kind of look at your universe of potential investments, where you think you might go,

do you take more of a kind of go anywhere approach with regard to, I guess maybe the question is what drives the portfolio inclusion, decision. Are you kind of taking a more top-down approach to this? Is it more about very much a bottoms up where you try to find the individual companies regardless of geography, regardless of what part of the market spectrum they're at? How exactly do you go about constructing a portfolio and how do you filter out and screen for what the best candidates could be? Yeah, so great question. I mean, so at Boston partners, we have an entire team of quantitative

analysts that have basically built and maintained a proprietary quant model that try to help us identify where value is effectively in the market. So as value investors, we're trying to incorporate not only value, but quality and momentum, and that that factor-based model helps us identify it. And from there, we basically have fundamental analysts that dig through the companies to ultimately determine whether those companies are suitable in the context of value, quality, and momentum and have a high probability of outperforming the market over time. So for JDIVI, you know, we're targeting typically 30 to 50 companies. So it's a relatively concentrated portfolio of

companies that would be defined as relatively high active share, at least relative to its index. And, you know, these are companies that we think on a three to five year basis can outperform the market. And so we're attempting slightly lower turnover than some of our other products to take advantage of some of the tax benefits that accrue to and, you know, ETFs. But, you know, in situations where a company does do well and outperforms and reduce its ability to compound for us in the future, you know, we will sell it and move on. But we take a very unconstrained approach to that. So we could be, you know, zero percent Japan. We could be all Europe. We really want to cast a relatively broad net to make sure we kind of maximize those characteristics in terms of

value, quality, and momentum. And it's ultimately what we believe will help us. us increase our chances of producing alpha over time. Hey, Josh, along those lines, if you look at the portfolio that you have now, can you give us a, for those people in the audience who aren't as familiar with that particular portfolio and product, where exactly is that portfolio tilting towards right now? And are there any early indications as you go through your screening and research process of any potential, I mean, not seismic changes, but anything that might be shifting underneath the surface with regard to how the portfolio could look in the coming months and quarters, given

given everything's happening right now. Yeah. So when I look at the portfolio, two parts of it that I get the most excited about are within materials and industrials. And I think, you know, just in the context of some of the things that we discussed at the opening here, which is you look at the periods of a weak dollar environment where international has been great, the 1970s, the 2000s, They were also associated with real asset cycles, so commodity cycles. And I, you know, so we look at the market today and you've seen central bank, you know, foreign central bank reserve diversification into gold, electrification trends impacting copper. So there's some drivers there that are supportive of the commodity thesis.

And then when we look at the companies within metals and mining, you know, they're historically difficult businesses, high capital intensity, lots of operating leverage. they have a history of poor capital allocation, but as it stands today, a lot of the management teams are doing a really good job allocating capital, and we're seeing really big free cash flow yields out of metals and mining companies. So, you know, we've benefited from this in the last couple of years, and I, you know, I think this is a trend that's, you know, potentially could stick around for a few years, just in terms of kind of strong returns within materials. And then, you know, if the companies do break discipline and start spending a lot of money, which they have a history of doing, we have some

industrial companies that would benefit that. So, you know, again, when I look at some of the benefits for U.S. investors for investing internationally, it kind of fits the profile of historical cycles where you've got some companies that have exposures to sectors where you just, you don't see as much of it in the S&P 500. And the underlying fundamentals of these companies look quite good going forward. You know, David, one of the implications of this conversation so far is that there's been a catch-up trade in effect and more of a maybe a catch-up amount of interest in investors into the international side of things. That almost has the implication that folks are under-indexed to international stocks versus the domestic U.S. ones. We've had similar conversations

about alternative assets like real estate or like commodities to Josh's point as well. I wonder from your perspective, just how much, generally speaking, because we know that Every investor is different. But across the ETF investor universe, as you can see it over at Schwab asset management, just how much are some investors under-indexed to international equity exposure? And how much more runway could we see with that interest with the under-indexing and the way that it is right now? You know, it really depends on the desired outcome, the longevity and the investor. But you're right, Dom, in that many investors, either intentionally or unintentionally.

intentionally have over pivoted to U.S. equities, whether that be the unintentional consequences of not rebalancing back to strategic weights after the run-up that we've seen in 24 and 25, or they're playing out the more domestic-oriented trades that they see and the splash that they see when names like SpaceX come to market. So I think many investors missed the opportunity to do exactly what we talk about, what you talk about on CNBC all the time. And that is, you know, how do you buy the winners and sell your loser, or excuse me, buy what's coming next in that trade? And part of that comes back with systematic strategic rebalancing of saying, all right, I've got an allocation historically of 10, 15, or 20 percent to international equity.

Well, and that starts to erode because of outperformance in the U.S. markets. How do I systematically sell those U.S. equity positions out and reallocate to the international equity world to rebalance that portfolio? So given the extent of the run, I'm sure many investors are probably in from their strategic allocation, you know, two, three, four, five percent underweight that they would benefit from coming back and rebalancing to their strategic long-term weights. You know, Josh, one of the other points there as well is if you take a look at the rebalancing aspect of it, for a portfolio manager that has such a concentrated portfolio of

roughly 30 to 50 stocks, rebalancing is also something that you do? Is it systematic for you? Do you do it on a periodic basis? Or is that kind of fundamental research, the real driver of what goes into a portfolio and what gets kicked out? Or is there more of a kind of macro construct that you manage the portfolio too and then kind of find ways to fill in with the stocks when you find them? Yeah. So, I mean, to some degree, it's daily, right? So we have a team of analysts that are, you know, estimating target prices, making recommendations on companies.

You know, a company that we hold that's byrated that we like that we think can compound at good rates of return and we wake up one day and there's something that's changed that thesis. And, you know, we like to think of ourselves as humble value investors. There's going to be things that we get wrong. And one of the best things we can do for our investors is to sell the business, sell the stock and move on. So it's a daily exercise, but, you know, ultimately we're targeting a portfolio that's not turning over a lot. and ideally we're more right than we're wrong and generally holding our companies over time. But certainly as the role changes and the data changes as it relates to our companies and our estimate of their intrinsic value, you know, we could change the portfolio on a daily basis.

All right. And one final question to the both of you. It has a similar tilt, similar kind of theme, but it'll be kind of customized for each of you guys individually. David, I will start with you. artificial intelligence, obviously a very key theme and driver of the investing world over the past three to four years, arguably longer. How much is the AI story going to affect the companies that come to light under these screens in the future for international investing? In other words, how much do we have to focus a little bit more on the tech aspect of certain geographies and certain markets as opposed to just the overall traditional fundamental value

of them? You know, I think it's going to play a fairly significant role. And part of that may come more from the regulatory environments across the different jurisdictions and the way that U.S. may treat something versus the EU versus Asian economies. I think that is not really played out in its full extent yet. And I think we'll definitely impact the way that the tech and the generative AI trade plays out across these jurisdictions, not only in the use cases, but in the producers of the models, the semiconductor producers, and every part of the manufacturing line from the start to the end of when it reaches the end consumer. And Josh, similar question.

How much is your portfolio as it stands today? How much has it been influenced by that kind of tech AI trade? And how much do you anticipate that your portfolios will be affected by tech AI semiconductors and the like in the coming months and years? Yeah, so we've benefited from some holdings in Japan and Korea that have benefited from the general cap-back spend and done well there. I mean, obviously, what we're trying to figure out is how long can this go? And there's, you know, there's some caution flags on the horizon with a lot of the debt spend that's occurring.

So we're working our way around that. I think one of the things that we have liked, and maybe you could say to some degree is look, is that a lot of what we were finding in the last three or four years would be in the realm of kind of the more asset-heavy businesses, so financials, industrials, materials, companies, and, you know, at least as the way I look at the world, you know, AI seems to be more negatively impacting software companies, business service companies, and not asset-heavy businesses. So even, you know, even if we have a more aggressive rollout of AI in terms of the way it impacts the global economy, we will still need raw materials. So from some sense, we continue to focus on those businesses

because we will need more copper. We will need more broad materials to basically electrify the economy. So that's kind of helped us in that sense and maybe helped us avoid some of the pitfalls of some of the victims of the AI trend. Now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand ETFs with our Markets 102 portion of the podcast. Josh Jones, portfolio manager over at Boston Partners, continues with us now. Josh, thanks for taking the time, first of all, to stick around for the podcast.

I would like to pick up this conversation a little bit where we left off in the online show over at ETF Edge. And that is to talk a little bit about the differences that go into investing in international stocks versus investing in domestic U.S. ones. I mean, there are some obvious ones I know, currency exposures, having to understand maybe local politics and regulations a little bit better, the tax implications and everything else. But I wonder from a portfolio manager's perspective, what do ETF investors in your mind have to be more aware of when they're investing in international stocks versus U.S. ones?

Yeah, so, and thanks for having me, Dominic. When I think about the international markets, and you know, you pointed out some of the the obvious differences, I mean, one of the things that I've always kind of noticed over time, and it's a generalization, but I think there's, there's element. the truth to it is that a lot of the U.S., the big companies, they're just very shareholder-friendly. They care about their stock price. And you go to the international markets and a lot of the really big companies, the mega-cap companies, they're a little bit more bureaucratic.

They may be more responding to the government, just news flow, and they care a little less about their stock price than their U.S. peers. Whereas you kind of go down cap and you get some larger cap companies, some mid-cap companies, they tend to be really nimble in shareholder friends. And I think the beauty of the international markets is for active investors, if you dig through these companies, you can find real gems that are mispriced and awful lot of investors' radars. And I think that's why the international markets have been kind of a fertile ground for active investors over time.

But they haven't been over the course of the past five years, up until maybe the last one or two, where we've seen a lot more of that outperformance take hold. What exactly in your mind is keying investors more towards that international? story. You had mentioned during the show that it's returns, that oftentimes those things kind of help, you know, where there's smoke, there's fire, and people are kind of looking for that next hot thing. But how much do the international stories that you're evaluating on a daily basis, how much have they improved versus how much have investors just keyed more in on them? I guess is the best question. Yeah. So it's a great question. I think one of the things that we noticed,

I mean, we're very data-driven. And we were, what you were seeing in the data is the international markets in the last five years, value has been outperforming, even though the big kick to a dollar-based return started in 25. So, you know, pre-25, value was doing better. And that surprised people when you'd say that. So, and I think when you look at that, what it happened is in the period of 2010 to 2020, so many people had left value-based companies, so banks, materials, industrials, that effectively their cost of capital have gone up. So the P.E. is compressed. And, you know, the management teams are responding to that. And so they see their, you know, they used to trade it 20 times earnings.

And they traded 10 times earnings. And they say, well, we have a high cost of capital. So we're going to pull back on investment and just generate lots of cash. And what that does is it precipitates healthy fundamentals. And so you could see in the data that return on equity was going up, return on capital was going up, free cash flow yields were going up, well, valuations were really attractive. And that's just a pretty potent combination if you look at it historically. So it was quite intrinsic, and it's really been intrinsic in the last five years. But, you know, again, as you point out, there's an element where investors kind of woke up in

2025 and started paying attention. They are paying attention now, again, because of those fundamentals, the improving valuations versus their U.S. counterparts. But in your mind, is it a sustainable trend? How much can investors bank on the relative valuations of those international stock? against their U.S. peers or close to peers. And by extension, how much more can we see this outperformance take hold? The gap was pretty big going into the last few years.

That implies that there may be even more of a catch-up trade to be had, but at the same time, we're dealing with a confluence of internationally-based geopolitical concerns that are out there, which can provide a headwind to many of those stories on a big picture basis. How does a portfolio manager balance some of those aspects? Yeah, I mean, so I look at the international portfolio that we run at JDBI, and, you know, it's started 2025 between kind of nine to ten times forward PE, just on a weighted average basis of the companies we invest in. It's 12 today, so there's been some revaluation. But, you know, you take the S&P 500 and you take out the Mag 6, which are kind of their own beast, if you will,

and you look at the valuation of the other companies, and it's 16. 17 times earnings. So there's still a valuation argument there. The expected earnings growth rate of our companies is quite healthy. So you're not just taking a leap of faith on pure PE, you know, multiple expansions. So the setup intrinsically from a value and fundamental perspective is there. And then it's just down to the dollar component. And, you know, kind of in reference to my, to my comments on the live piece, you know, again, it's hard to forecast currencies, but on a real rate basis, the dollar is still expensive, which if we assume over time real rates kind of neutralize the zero that they're mean reverting, it seems to also be what the Treasury wants.

You know, the U.S. has a lot of debt. So I don't think it's a leap of faith to say that over time, the dollar could weaken. And then you have this nice combination of healthy fundamentals and a weakening dollar. And then if you overlay my kind of general bias towards potentially a real asset cycle and exposure there, I think the metals and mining opportunities, some of the industrial exposure there, industrial companies that have exposure there, better in the non-U.S. markets than their relative counterparts in the U.S. markets. So that could be a pretty productive environment where, you know, investors are getting that diversification away from tech companies.

They're benefiting from potential dollar weakness, from potential kind of some trends in the real asset markets. So I think the setup's pretty good. So the setup's pretty good, even though as of this taping of this podcast, we have friends headlines out about animosity, if you want to call it that, between the U.S. and Canada for a new trade agreement. Both sides have walked away from the negotiating table and tariffs are now being escalated by the Trump administration and by the Carney administration north of the border in Canada. There is still a war going on in Iran with the United States involved, with many of the Gulf

Coast countries out there that's disrupting global energy markets to a certain degree. there are stories about whether or not interest rates, not just here in the U.S., but in other places like in Asia, in Japan and Korea, are actually going to be something that we have to worry a little bit more about, the dynamic there, vis-a-vis the AI build-out, how much debt is going to be used, is there a crowding out effect versus government bonds because so many high-grade issuers are issuing that kind of debt. there are many macro factors. How much does a fundamental portfolio manager who picks stocks in many of these jurisdictions, regardless of what policies are, how much do you have to pay attention to those types of headlines and how closely do you have to follow the developments outside of those headlines? Yeah, I mean, we're following all that stuff closely and we're trying to kind of determine whether it has an impact on our businesses.

I would say that, you know, 80, 90% of the time is noise that's not really impacting our company's fundamentals. And oftentimes it's creating events where we can capitalize on that and add to positions that we like if they trade off on it. But, you know, I mean, you look at the, if you're producing goods in one country and selling them to the U.S. market, tariffs are going to matter. So you have to understand that. And that's what our analysts are paid to do to try to understand that. So, you know, it's impossible to predict the future. I've generally been of the opinion that, you know, some of these tariff policies will negatively more impact the U.S. economy than they will than non-US economy. So I think it's hard to say that, you know, as an international investor,

we should be more worried about it than our respective U.S. investor. I mean, it seems to be creating inflation and putting pressure on rates. You know, the oil markets are certainly not helping the global economy. But all of that just amounts to, you know, the more kind of chaos you get, the higher cost of capital you get across the world. You know, Japan comes under pressure because oil goes up. They have to sell treasuries. That puts pressure on, you know, the cost of capital and that favors value investing and, you know, where are valuations the best in the world or outside the U.S. So you can kind of simplify these things, and that's, you know, over time, I've tried to simplify them, and I think it could be quite productive.

And before we let you go, one final question. As you look out towards the balance of the year, is there something that you are particularly more concerned about with regard to the portfolio that you currently manage right now, whether it be company or industry focused or even geopolitically focused, is there something that kind of makes you worry a little bit more about how your stocks will do in that kind of environment? So I would say two of the big source of Alpha in the last 18 months has been a combination of some of the tech companies

that have exposure to the CAPEX for AI, and then industrials and metals and mining. And some of the industrials and metals and mining, it's kind of been consolidating through Q2, and they're actually starting to do really well right now. I think the thing that I wake up and worry the most about is, you know, we have kind of taken some chips off the table, if you will, on some of these AI-related companies,

but, you know, is this the end or is there more to go? Some of the circular financing and the credit build-up worries me a little bit, the return on capital for some of these companies. So that part of it worries me a little bit more. You know, in a weird way, if AI just, if we wake up and it breaks tomorrow and is really bad, it's really bad for the U.S. economy. it's bad for the U.S. wealth effect, which just means we're going to have a weaker dollar. And some of the metals and mining stocks we own, industrial stocks, and other companies will do even

better. So there's some natural balances in the portfolio, and that certainly helps me sleep better. That's certainly a diversified portfolio is something that everybody wants to strive for so that the levers go one direction or the other at the same time. All right, Josh Jones at Boston Partners, thank you so much for taking the time. We hope you'll come back and see us again soon. great thanks domin it all right well that does it for the etf edge podcast thanks for listening join us again next week or just head over to etfedge dot cnbc.com over the last few decades technology has transformed our world in amazing ways through it all investco qqq etf has connected investors to the forefront of innovation access the future today with investco qq let's rethink possibility there are risks when

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