Disruptive Theme of the Week: Europe Defying Low Expectations

Some of the best-performing ETFs YTD are invested in European companies. European equities have outpaced U.S. stocks by the widest margin since 2000. The possibility of ending the Russia-Ukraine war and the accompanying increase in defense spending in Europe have driven a rally in European stocks. This is due to the assumption that those developments will stimulate the continent’s economic growth. However, European markets are also being buoyed by more supportive monetary policy, with rate cuts on the table and cheaper relative valuations.

There are positive signs that the European economy does appear to be rebounding. After a long period of contraction, the latest Eurozone Manufacturing PMI reading came in at 47.6 in February 2025, surpassing estimates and approaching 50, the level that signals economic expansion.

The recent German election results are also being viewed as a positive, spurring hopes for pro-growth reforms. Further, renewed alignment and cooperation among Eurozone member countries has been a cause for optimism and revitalized investor enthusiasm.

Goldman Sachs Research sees strong corporate earnings, expanded defense expenditure, and minimal U.S. tariffs targeting Europe, all driving continued upside in Europe’s equity markets. Goldman also notes that just 8% of attendees at its Global Strategy Conference at the start of the year expected to see Europe at the top of the leaderboard among developed markets this year.

This year, one of the top-performing non-levered European ETFs is the iShares MSCI Poland ETF (EPOL C), which is up 38% YTD. Poland has emerged as one of the strongest economies in Europe. This happened despite the headwind of regional turmoil brought on by the Russia-Ukraine war. Poland’s GDP is expected to grow by 3.6% in 2025. And peace could bring even more prosperity.

As mentioned, investors are optimistic about the growth prospects for Germany under new leadership. The country’s economy was previously teetering on the edge of recession. ETFs benefiting from improved sentiment for German stocks include the First Trust Germany AlphaDex Fund (FGM C), 22%, the +Global X DAX Germany ETF (DAX B-), 18.3%, and the +Franklin FTSE Germany ETF (FLGR B-), +18.1% YTD.

Other country ETFs exhibiting strong performance YTD include the iShares MSCI Austria ETF (EWO B), with a total return of 21.6%, and iShares MSCI Spain (EWP B+), with a gain of 23.7%.

For investors looking for broader, more diversified exposure to Europe, First Trust has two ETFs that have delivered stellar returns this year, the First Trust STOXX European Select Dividend Index Fund (FDD B+) and the First Trust Eurozone AlphaDex ETF (FEUZ C+). FEUZ is up 16.4%, and FDD is up 22%. It also currently pays an attractive 6.5% annual dividend yield thanks to its exposure to high-dividend-paying European bank names.

The rearmament of Europe and the shift toward defense independence from the U.S. has greatly boosted European defense stocks. There are a few ETFs that offer exposure to this trend. The Select Stoxx Europe Aerospace & Defense ETF (EUAD) has seen over $450 million in inflows this year despite barely any inflows last year in the wake of its October 2024 launch. Its performance YTD is impressive as well, up 41.7%.

In Europe, the Future of Defence UCITS ETF (NATO) just crossed $1.9 billion in assets under management. Thi was thanks to its significant weight to European defense names, strong performance, and relevant ticker.

While there is a perception among U.S. investors that the U.S. has been the “place to be” over the last few years, the SPDR Euro Stoxx 50 ETF (FEZ B+) is now up 46.8% on a cumulative 3-year basis versus 28.3% for the SPDR S&P 500 Trust (SPY A) and 33.3% for the Invesco QQQ Series Trust (QQQ B+), undermining that conclusion.

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