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.
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.
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.
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.