Foreign Stocks Are on a Roll. They Could Lift the 60/40 Portfolio.

International stocks are helping balanced funds’ returns. (Kazuhiro Nogi / AFP / Getty Images)

Key Points

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• International stocks are outperforming U.S. stocks in 2025, with the MSCI EAFE index returning over 25% compared to the S&P 500’s 13%.
• A weaker dollar, which has fallen about 8% this year, is boosting the value of international profits for U.S. investors.
• Funds with international stock exposure, like Vanguard LifeStrategy Moderate Growth, are performing well.

Foreign stocks are having a strong year—potentially giving 60/40 portfolios a lift.

After years of losing ground, international stocks are beating U.S. ones handily in 2025. While the S&P 500 has returned 13%, the MSCI EAFE index of developed country stocks has returned more than 25%.

Foreign stocks have a number of factors in their favor, and it isn’t just the gradually slowing U.S. economy. The dollar has fallen sharply this year—about 8%—and could sell off further now that the Federal Reserve lowered U.S. interest rates on Wednesday. A weak dollar increases the value of international profits for U.S. investors, accounting for about half the MSCI’s index’s gains this year.

While currency fluctuations can be volatile, foreign stocks still have plenty of room to run. The average stock in the MSCI index trades at just 15 times forward earnings, far lower than 23 times for the S&P 500.

Foreign stocks’ strength is good news for those with broadly diversified investment portfolios—including long-suffering 60/40 investors. These portfolios, with 60% in stocks and 40% in bonds, are supposed to be slow-but-steady performers. But they have struggled in recent years, thanks in large part to lackluster bond returns.

“More globally diversified 60/40 portfolios are winning for the first time in a long time,” noted Morningstar analyst Jason Kephart in a report Thursday.

Kephart singled out the Vanguard LifeStrategy Moderate Growth fund, a balanced fund that has international stock exposure and has returned nearly 13% so far this year, almost two percentage points better than a comparable U.S.-only portfolio.

In other words, holding international stocks have helped balanced funds nearly match the returns of the S&P 500—despite keeping nearly 40% of their money in less volatile bonds.

The Vanguard LifeStrategy Moderate Growth isn’t the only balanced fund Morningstar recommends. BlackRock Global Allocation, T. Rowe Price Global Allocation, and American Funds Global Balanced are also among its top picks.

While allocations can differ for actively managed funds, funds that split stocks between U.S. and foreign stocks typically have around two-thirds of their stockholdings in the U.S. and one-third abroad, reflecting the split of global market capitalization.

Many balanced funds also own international bonds. Although unlike with stocks, funds frequently hedge currency exposure in their bond portfolios, Kephart notes.

“Hedging those back to the U.S. dollar helps them behave more like the boring bonds you want to use to protect against stock market swoons,” he says.

Write to Ian Salisbury at ian.salisbury@barrons.com