Bull vs Bear: Do Europe ETFs Need a Spot in Portfolios?

Fitzgerald: I think it’s important to start by emphasizing that U.S. investors are likely starting with a very low, if any, allocation to international equities. I’m not suggesting investors need to sell all their U.S. equity ETFs and replace them with international or European equity ETFs. But I do think international exposure will become much more important in the years ahead.

Most investors are significantly underweight international equities. This has worked out for the past decade-plus, as U.S. market returns have trumped European equities. However, I think the current environment is on the precipice of significant change.

Carving out a small but meaningful part of a portfolio for a Europe ETF could be a powerful diversification play. Funds to consider include the Goldman Sachs ActiveBeta Europe Equity ETF (GSEU A-), the Vanguard FTSE Europe ETF (VGK A), and the WisdomTree Europe Hedged Equity Fund (HEDJ B).

There are many reasons why I think European equities are poised to continue their outperformance for years, but at a minimum, an allocation provides diversification benefits. Diversifying portfolios with international exposure may help spread out risk — something particularly important during periods of uncertainty. 

Wodeshick: I believe investors would be prudent to adapt their portfolios to take on a more attractive risk profile. That said, I assert that the answer to these problems does not lie in European stocks. 

To start, branching out to European companies won’t completely clear an investor from exposure to U.S. market mayhem. The United States remains one of the most dominant economies in the world. Should the country experience significant inflationary pressures or even a recession, other countries could very well feel the ripple effects. 

The economic correlation between the United States and Europe remains significant. A recent report from the U.S. Chamber of Commerce noted that the commercial relationship between the U.S. and Europe represents about $9.5 trillion. On both sides of the Atlantic Ocean, the partnership between Europe and the United States accounts for 16 million jobs. 

Beyond U.S. ties, investors should also remain vigilant over how European countries are performing at the moment. Many countries within the European economy have been bogged down by sluggish growth, making the overall potential for the continent a bit more tepid. 

Earlier this month, the European Central Bank reduced its expectations for economic growth within the eurozone. Expectations now sit at 0.9% for 2025 growth, down from a previous 1.1% estimate. 

“Special investment is, I think, quite subdued in Europe,” noted Mario Centeno, ECB policymaker and governor of the Bank of Portugal, in an interview with CNBC. “It will take four years for us to go back to the 2023 level of investment in the private sector, six years in terms of housing investment [and we will be] going back to 2022 levels only in 2028.”

Expectations are individually reducing for some of the most crucial countries in Europe, as well. Earlier this week, the Ifo Institute for Economic Research cut its forecast for Germany’s economic growth to just 0.2% this year. This reduced outlook puts projected growth at half of what the institute expected for Germany at the end of last year.

Lastly, it may be true that there are few to no indicators that Europe could end up in the United States’ crosshairs over trade and tariffs. However, given the uncertainty of future U.S. economic policy, there’s always a chance relations could go sour.  As such, it may be more prudent to look within the U.S. economy in lieu of trying to find a way out of it.

Fitzgerald: European stocks are positioned for success, particularly as the recession odds in the U.S. are steadily increasing. DoubleLine CEO and CIO Jeffrey Gundlach recently said Europe could be in the process of reindustrializing due to everything going on with tariffs and NATO funding. This could potentially lead to continued multiyear outperformance of non-U.S. stocks versus U.S. stocks.  

Markets had already priced in weak growth for Europe in 2025, lowering the bar needed for Europe to perform well. Increased infrastructure and defense spending has been a large catalyst for the recent strong performance. This can potentially be a multiyear tailwind for Europe ETFs.

Additionally, Goldman Sachs recently lifted its expectations for German real GDP expansion. As many opportunities seem to be focused on Germany, investors may consider single-country ETFs like the Franklin FTSE Germany ETF (FLGR B-) or the Global X DAX Germany ETF (DAX B-).

Wodeshick: I still think it’s too early to give up on the United States. The U.S. economy may seem a bit broken right now, but it’s not unsalvageable. Sure, the traditional large-cap growth strategies are out of favor at the moment. And yes, advisors and investors are also selling out of high-risk assets like small-caps and cryptocurrency. 

But just because the go-to equity strategies are not working now doesn’t mean there aren’t ways to play the markets. Instead of running for cover, investors may want to try approaching the U.S. markets from a different angle.

Moments of market turmoil can truly highlight the advantages of value investing. Value strategies look for undervalued companies that offer compelling balance sheets and long-term potential. 

Even though growth stocks dominated returns for 2024, now is the time to pivot to value. Value-focused strategies can help investors locate the companies best positioned to deliver returns, even amid this economic uncertainty. 

Additionally, the current market sell-off may help facilitate a relatively inexpensive buy-in for value investors. While many traders run for safety, an experienced value team could pick up excellent companies at a competitive discount. 

“According to our valuations, on both an absolute and relative value basis, we think the rotation into value stocks still has room to run,” noted David Sekera, CFA, chief US market strategist for Morningstar. “Not only are value stocks more attractively valued, we think the rotation into value will pick up steam as the economy slows and growth stocks’ earnings growth begins to slow.”

Looking ahead, value investing could very well cement itself as the go-to strategy for playing the equity market. This strategy can help facilitate portfolio growth while hedging against future inflationary risks.

Europe ETFs Already Leading in 2025 Returns

Fitzgerald: European stocks have already begun to outperform. Each one of the Europe ETFs I mentioned earlier — GSEU, VGK, and HEDJ — is outperforming the S&P 500 by at least 16 percentage points year to date through March 17. 

It’s important to note that even as European valuations have increased — despite earnings staying relatively stagnant — Europe still looks relatively cheap compared to the U.S. Even after recent market turmoil, valuations for U.S. equities are still near all-time highs. Looking at particular sectors, healthcare is cited by Goldman Sachs as an area with many possibilities for the coming few years. Plus, the sector is still not particularly expensive.  

Wodeshick: European stocks may be seeing some near-term success, but it’s far too early to count the U.S. out. Investors can still access a number of vehicles to play in the U.S. market, not around it. 

That said, inflationary signals and tariff troubles are creating an air of uncertainty. The easiest way to cut through that noise is with the help of an active portfolio team. 

Actively managed ETFs can give investors a straightforward method for accessing the expertise of experienced fund managers. By leveraging knowledge of market experts, investors could find themselves in a better position to survive or even thrive in this macroeconomic environment. 

Crucially, active ETFs can provide needed flexibility in times of market tension. Should the news cycle spark a further sell-off, an active fund can pivot investments to adapt to changing conditions. 

These active advantages also work inversely. Active ETFs can offensively reposition assets to better capitalize on future market rallies, should they occur. 

As a good example, take a close look at the JPMorgan Active Value ETF (JAVA C+). This fund offers capital appreciation through an actively managed value strategy.

JAVA uses J.P. Morgan’s equity market expertise to construct a portfolio of companies with dynamic value potential. The fund uses a bottom-up approach to target companies with great value propositions within each sector. 

For investors looking for an experienced hand to guide them through value investing, JAVA could certainly help. The management team behind JAVA has an average of more than 20 years of industry experience. 

Fund flows data helps illuminate how investors may be using JAVA as a hedge against volatility. According to FactSet, JAVA has seen over $1.3 billion in net flows between November 1, 2024 and March 14, 2025. 

Fitzgerald: You bring up some excellent points, Nick. However, I still think an allocation to Europe ETFs is beneficial in the current environment, characterized by uncertainty and volatility. I look forward to revisiting this topic to see if European stocks were able to maintain their lead. 

For more information, please visit VettaFi.com | ETF Trends.