Europe ETFs Beating S&P 500 in 2025: Here's How

European equity-based exchange-traded funds (ETFs) have been outperforming Wall Street indexes this year. The top-performing Europe equities ETF is iShares MSCI Poland ETF EPOL (up 25% YTD) this year, followed by iShares MSCI Sweden ETF EWD (up 17.2%), iShares MSCI Spain ETF EWP (up 13.4%), SPDR EURO STOXX 50 ETF FEZ (up 13%) and Global X DAX Germany ETF DAX (up 13%).

In comparison, Wall Street has delivered meager returns in 2025. So far this year, the Dow Jones has gained 2.1% and the S&P 500 has advanced 1.3%, while the Nasdaq has retreated about 1.2% (as of Feb. 26). Let’s find out why the rally has shifted to the other side of the pond.

Upbeat GDP Growth

The Eurozone's annual GDP growth rate was confirmed at 0.9% in the fourth quarter of 2024, unchanged from the previous period and in line with the preliminary estimate. This marked the joint fastest expansion since early 2023, thanks to lower borrowing costs and easing inflationary pressures.Among the bloc's largest economies, Spain led with robust 3.5% growth, followed by the Netherlands (1.8%), France (0.7%) and Italy (0.5%), per tradingeconomics.

Cheaper Valuation

Europe ETFs have been undervalued than U.S. stocks and ETFs. The P/E ratio of the largest Europe ETF Vanguard FTSE Europe ETF VGK stands at 17.0X while its U.S. counterpart — Vanguard S&P 500 ETF VOO — trades at a P/E of 27.5X. Other big Europe ETFs have also been trading at a discount to U.S. ETFs, diving a rally in the former funds this year with an improving economic backdrop.

No Tech-Dependent Rally in Europe

U.S. indexes like the S&P 500 and the Nasdaq were tech-dependent. The “Magnificent 7” stocks and their exposure to the booming artificial intelligence (AI) field led to the rally in U.S. stocks last year. But the Mag 7 stocks have fallen from their grace lately thanks to the emergence of China’s DeepSeek.

Note that DeepSeek, a Chinese startup developing AI models, started to grab headlines with the release of its new R1 model in late January. According to Yahoo Finance, the company revealed that training the R1 model cost just $5.6 million, significantly less than the $100 million required to train OpenAI's GPT-4 model. DeepSeek’s low-cost success put the potential feat of Mag 7 stocks into question (read: DeepSeek Buzz Boosts China Tech ETFs). 

With big tech stocks under pressure, big U.S. indexes (that have so far enjoyed a concentrated rally) have also succumbed to failure this year. On the contrary, winning Europe ETFs have major exposure to non-cyclical and other sectors associated with broader economic growth.

Winning ETFs like EPOL, EWD, EWP and FEZ have key exposure to sectors like Finance, Consumer Discretionary, Industrials, Communication, Utilities and Healthcare. Only DAX ETF puts heavy exposure to areas like Industrials, Information Technology, Financials, Consumer Discretionary. In a nutshell, Europe ETFs have presented a broad-based rally instead of a concentrated one. An improving Euro economy has thus helped stocks to soar this year.

Euro Area Unlikely to Face High Inflation Ahead

The consumer price inflation rate in the Euro area was confirmed at 2.5% in January 2025, the highest rate since July 2024, due to high energy costs. The core inflation rate, which excludes volatile food and energy prices, remained unchanged at 2.7% for the fifth successive month, marking its lowest level since early 2022. On a monthly basis, consumer prices fell by 0.3% in January, following a 0.4% increase in December. 

ECB on Rate Cut Spree

The European Central Bank lowered its key interest rates by 25 bps in January 2025, as expected, reducing the deposit facility rate to 2.75%, the main refinancing rate to 2.90%, and the marginal lending rate to 3.15%.The move marked the fifth reduction since the easing cycle began in June 2024. This move also reflects the ECB’s updated inflation outlook, with price pressures easing in line with projections.

Bottom Line

While the broader-based rally is beneficial for Europe ETFs, we would like to note that Trump's tariffs may hinder Europe's growth to some extent. Investors need to remain vigilant about this.

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This article originally published on Zacks Investment Research (zacks.com).

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