This Vanguard ETF Is Crushing the Market in 2025. Should You Buy?

President Donald Trump has been in office for only two months, but already his saber-rattling over tariffs has roiled markets.

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The S&P 500 (SNPINDEX:$SPX) last week sank into a correction, defined as a drop of 10% or more from a recent peak, as investors have responded to weakening consumer sentiment and other signs of macroeconomic headwinds by selling stocks. And the uncertainty around the on-again, off-again tariffs has weighed on business and investor confidence.

While concerns about a recession might be premature, President Trump and other administration leaders have acknowledged that short-term pain might be necessary to reset the economy according to his vision of strengthening the U.S. manufacturing base and erasing trade deficits with the country's top trading partners. Most economists believe that tariffs will have a negative impact on economic growth and raise prices, and a number of business leaders from a wide range of industries have echoed those statements.

Not surprisingly, some investors are looking to invest outside of the U.S. as a hedge against the volatility and risk around tariffs and weakening economic indicators.

Diversifying your portfolio with international stocks isn't so easy, especially since companies outside of the U.S. often receive limited coverage. But one seamless way to do it is by investing in an exchange-traded fund (ETF) that holds international stocks. One Vanguard ETF in particular could be just right for the current market environment.

Image source: Getty Images.

Grab your passport

One of the top-performing ETFs this year has been the Vanguard FTSE Developed Markets ETF (NYSEMKT:VEA), which invests in large-cap stocks outside the U.S. Through Friday's close, the ETF is up 10.8% in 2025, easily outperforming the S&P 500, which is down 3.5%.

For the first few weeks of the year, the two investments essentially traded in tandem, but they began to bifurcate shortly after Trump took office, as the chart below shows.

VEA data by YCharts.

The Vanguard FTSE Developed Markets ETF holds a number of top companies from Europe and other parts of the world, including SAP, Novo Nordisk, ASML, and Nestlé. Top holdings from outside of Europe include HSBC Holdings and Toyota Motor.

About 55% of its holdings come from Europe, while 34.5% come from the Asia-Pacific region.

The fund holds nearly 4,000 stocks, with a median market cap of $45.9 billion. But the top 10 holdings, which include the names above, make up roughly 10% of the total portfolio. The Vanguard ETF is designed to track the FTSE Developed All-Cap ex-US Index.

In addition to offering investors the benefit of exposure to stocks that aren't directly in the line of fire from U.S. tariffs, the Vanguard FTSE Developed Markets ETF also has another advantage over the S&P 500: It's significantly cheaper.

The ETF currently trades at a price-to-earnings ratio of 15.9, compared to the S&P 500 at 25.

That premium is the result of the S&P 500's earlier outperformance during the bull market that began in 2023, which was driven by the surge in "Magnificent Seven" stocks following the launch of ChatGPT and the beginning of the AI boom.

The reversal in that trend seems to show that investors are rotating out of the U.S. to capitalize on the better value represented by the Vanguard FTSE Developed Markets ETF.

Is this Vanguard ETF a buy?

Given the valuation gap between the international-focused ETF and the S&P 500, the Vanguard FTSE ETF looks like a good bet to outperform, especially if the uncertainty around tariffs and weakening economic sentiment continues.

If you're looking to diversify from U.S. stocks in these uncertain times, this developed markets ETF is an easy way to get exposure to large, profitable companies in Europe and elsewhere around the world.

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HSBC Holdings is an advertising partner of Motley Fool Money. Jeremy Bowman has positions in ASML. The Motley Fool has positions in and recommends ASML and Vanguard Tax-Managed Funds - Vanguard Ftse Developed Markets ETF. The Motley Fool recommends HSBC Holdings, Nestlé, and Novo Nordisk. The Motley Fool has a disclosure policy.