President Donald Trump promised to make America great again. But so far to investors, his policies are making Europe great again versus the S&P 500.
European ETFs are on fire this year compared with U.S. stocks. The $20.6 billion-in-assets Vanguard FTSE Europe ETF is up 12.7% this year. That blows away the 4.5% drop by the S&P 500 in that same time. And Europe's outperformance is even greater if you factor in the higher dividend yields. The 10 largest Europe ETFs by assets yield an average of 3.05% — more than twice the S&P 500's 1.3% yield.
European stocks are getting a lift by big plans for defense spending following Trump's recent policy shifts with NATO. Additionally, tariffs are poised to hurt U.S. economic growth, making Europe look better in comparison. And Trump's actions might be the incentive Europe needs to finally refocus on economic growth.
"Chart strategists have talked about this for a while, but now the macro story confirms it: Global convergence rather than U.S. exceptionalism," said David Hauner, global strategist at Bank of America. "U.S. stimulus is maxed out: no rate cuts, no fiscal impulse according to our economists. Meanwhile, Europe and (emerging markets) are adding stimulus. Our growth forecasts reflect this by a shift of GDP growth from the U.S. to the rest of the world by about half a percentage point."
MAGA Gives Europe Firepower
Europe's spending spree on defense is the first and most direct way Trump's policies are lifting European stocks.
"Amid doubts over the U.S. commitment to NATO, European allies have significantly increased their defense budgets," said Taylor Krystkowiak, investment strategist at Themes ETFs, issuer of the NATO ETF. "Non-U.S. NATO members are set to reach $380 billion in defense spending this year, with 23 countries achieving the 2% GDP target — an all-time high."
But tariffs' hit on the U.S. economy is a relative lift to Europe, too. "The eventual overall level of tariffs will have repercussions for the U.S. stock market: Every five-percentage-point increase in the U.S. tariff rate is estimated to reduce S&P 500 earnings per share by roughly 1% to 2%," said David Kostin, chief U.S. equity strategist at Goldman Sachs Research.
Europe ETFs Enjoy The Shift
European stock ETFs have some more market driven advantages, too. First of all, they tend to be more focused on value stocks than the U.S.-centric S&P 500.
"European equity ETFs tend to have more of an ... exposure to consumer staples, financials, health care and industrials and less information technology and communications services," said Todd Rosenbluth of TMX VettaFi. Additionally, European stocks are cheaper than U.S. ones. "European stocks have historically had lower P/E multiples than the U.S. making them an alternative and this year investors are turning to them," he said.
Investors, though, must know these European ETFs are built differently. Vanguard FTSE Europe ETF is a Pan-European ETF with exposure to eurozone markets like France and Germany plus the U.K. and Switzerland, he said. The iShares eurozone ETF is focused on the countries in the eurozone. "France and Germany are heavily weighted relative to VGK as there are no U.K. or Swiss stocks," he said.
Some, though, doubt European ETFs will keep outperforming. A swing back to growth could hurt European stocks, Rosenbluth said.
And Nicholas Colas of DataTrek Research says European stocks are simply rebounding from lagging for years. "One can argue that this year's rest of world outperformance is largely due to a modest snapback from last year's truly remarkable underperformance," he said.
Largest European ETFs
| ETF | Symbol | YTD % ch. | Assets ($ billions) | Yield |
|---|---|---|---|---|
| Vanguard FTSE Europe | VGK | 12.8% | $20.6 | 2.84% |
| iShares MSCI eurozone | EZU | 15.3% | 8.5 | 2.51 |
| iShares Core MSCI Europe | IEUR | 13.0% | 4.6 | 3.13 |
| SPDR EURO STOXX 50 | FEZ | 15.9% | 4.3 | 2.47 |
| JPMorgan BetaBuilders Europe | BBEU | 13.4% | 4.1 | 3.66 |
| iShares MSCI United Kingdom | EWU | 9.5% | 3.2 | 3.81 |
| iShares MSCI Europe Financials | EUFN | 21.6% | 2.7 | 4.44 |
| iShares Europe | IEV | 13.4% | 1.9 | 2.74 |
| WisdomTree Europe Hedged Equity | HEDJ | 10.8% | 1.7 | 2.94 |
| iShares MSCI Germany | EWG | 19.4% | 1.3 | 2.01 |
| SPDR S&P 500 ETF Trust | SPY | -4.6% | 1.26 |
