Europe emerges as a new bright spot for ETF investors

Exchange traded fund (ETF) investors’ focus has been biased towards the US market in recent years, given its stellar run of strong performance, especially in the technology sector.

European ETFs have been growing, however, although flows have been dominated by those funds that have provided access to US financial assets. These flows have become substantial and can have a significant impact on market prices.

It’s easy enough to understand why the US has been favoured over Europe in recent times. The world’s largest economy was enjoying robust GDP growth, while the globe’s biggest trading bloc was stagnating – in 2024 European stocks significantly lagged global markets; the Euro Stoxx 600 delivered a lacklustre 2% against the S&P 500’s impressive 25%.¹

But 2025 has witnessed ETF investors re-examine the Eurozone, especially in the wake of the US hitting the world with a new wave of import duties which continues to cause significant alarm across financial markets. But despite the heavy market volatility, year to date Europe is ahead by 13% while the US blue-chip index is down 6%.²  Despite the growth outlook for Europe being tarnished by the global trade situation, there are signs that global capital flows, including into ETFs are becoming more balanced.

Certainly, lower interest rates in Europe - with more cuts anticipated - alongside attractive valuations, and tentative hopes for a cessation of hostilities in Ukraine, have helped bolster ETF investor appetite.

But Europe’s story goes beyond mere recent index returns. Given the abundance of multi-national names based there – including pharmaceutical giants AstraZeneca and Roche, food group Nestlé and cosmetics company L’Oréal - it offers ETF investors broad exposure to global growth. These are heavyweight companies with considerable international appeal, and high barriers to entry.

Fixed income opportunities

European bond markets were not immune to the recent tariff-driven market volatility and certainly in the short term, we would expect that volatility could remain elevated, exerting further pressure on the asset class. However, medium term, given the European Central Bank’s monetary easing cycle, hopefully reduced tariff uncertainty, and Europe’s improving economic outlook, it could create a more favourable environment for European fixed income from mid-2025 onward.

While recent macroeconomic news has not been encouraging, micro fundamentals remain strong, characterised by healthy liquidity and robust balance sheets across both investment-grade and high-yield sectors. As a result, our outlook is positive for total returns in European credit markets in 2025.

Foundations for further growth

More broadly, the foundations are being laid across Europe for better and stronger GDP expansion. For example, the European Commission recently launched its Competitiveness Compass - a new initiative to improve economic growth in the region focused on decarbonisation, innovation and security. It will complement the already in place European Chips Act, which is designed to increase the bloc’s rank in the semiconductor industry. In addition, there is the NextGenerationEU stimulus package, which invests in digital transformation, healthcare and the green transition, among other areas.

Elsewhere Germany’s new leader Friedrich Merz’s revamp of the country’s fiscal rules to ease government spending constraints, especially for defence and infrastructure investments should mean a significant rise in spending in Europe’s biggest economy. This could potentially provide a significant boost for the Eurozone’s economy – and for European-focused ETFs. 

Since US President Donald Trump announced widespread tariffs on 2 April, there has been anecdotal evidence of global investors rebalancing their portfolios away from the US.

Europe, and European ETFs, should benefit from this trend. The combination of low interest rates and additional spending on security and infrastructure providing opportunities for European companies to grow earnings in coming years, should be a significant tailwind for European equity markets.