Why European Equity ETFs Deserve a Closer Look

What’s Behind the European Equity Surge?

According to DWS’s CIO View, the strong outperformance of European equities this year may have been sparked by the Trump administration’s policies, but it is structurally underpinned by macroeconomic changes that were already underway. Trump’s trade and foreign policy moves simply brought these shifts into sharper focus and highlighted a relatively cheap area of the global market.

Performance: European equities have underperformed the U.S. for decades. Within Europe, Germany has recently outperformed.*

* Based on regional Datastream total return equity indices. LSEG Data and Analytics, DWS Investment GmbH as of 4/7/25

Valuation (P/E ratio): Europe is still cheap compared to the U.S., while Germany is more expensive than Europe for the first time in 15 years.*

* Based on regional Datastream equity indices; Sources: LSEG Data and Analytics, DWS Investment GmbH as of 4/4/25

In particular, the administration’s hesitation to continue military aid to Ukraine under President Volodymyr Zelensky has triggered a broader mindset shift across Europe. There is now a growing consensus that Europe can no longer fully rely on the U.S. as a strategic partner.

German Chancellor Friedrich Merz cemented this trend by securing two-thirds support in the Bundestag on March 18 for a major constitutional amendment. The amendment allows the federal government to spend 300 billion euros on infrastructure and the German states another 100 billion euros.

Defense spending under NATO’s definition is set to gradually rise from 90 billion euros in 2024 to 170 billion euros by 2028, pushing it from 2% to 3.5% of GDP. Crucially, spending above 1% of GDP will be excluded when calculating the permissible new federal debt.

Additional defense and infrastructure spending could add more than 1 percentage point to GDP growth by 2027

Sources: German Ministry of Defense, DWS Investment GmbH as of 4/7/25

The fiscal package hits overall underutilized capacities. But one needs to look at single sectors in Germany.

Sources: Haver Analytics, DWS Investment GmbH as of 3/31/25

DWS believes this fiscal package is bullish for Europe’s long-term growth outlook. It addresses chronic underinvestment in infrastructure and persistent labor productivity challenges, both of which have weighed on Europe’s competitiveness for years.

This is not just a German story. It is likely to reinvigorate fiscal stimulus across the broader EU, particularly through the ReArm Europe Plan and Readiness 2040 initiatives. Together, these programs represent around 800 billion euros in defense and security-related investments, including 150 billion euros earmarked for joint military procurement with an emphasis on European-made systems.

Defense companies such as Rheinmetall, Leonardo, Thales, and BAE Systems have already seen their shares surge in anticipation of this spending wave.

European rearmament has been aggressively played on the stock exchange for over two years

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 4/4/25

DWS’s CIO Office does not view this as a short-term reversal but a multi-year structural shift, warranting an overweight rating on European equities. With Trump still early in his four-year term and U.S. policy volatility likely to remain high, European stocks may offer investors valuable insulation and a differentiated source of growth moving forward.

Two European Equity ETFs to Watch

Xtrackers offers two standout options for U.S. investors looking to tap into European equities while mitigating currency risk: the Xtrackers MSCI Europe Hedged Equity ETF

Both ETFs carry a 0.45% expense ratio and focus on European equities, but there are important differences that new investors should be aware of.

DBEU is the broader option. It includes mid-cap and large-cap companies from the United Kingdom, Switzerland, the Nordic region, and the European Monetary Union (commonly called the eurozone), covering major economies like France, Germany, Italy, and Spain.

DBEZ, on the other hand, restricts itself to the eurozone. That means it entirely excludes exposure to the U.K. and Switzerland, which together make up about 35% of DBEU’s portfolio.

The country selection differences create noticeable sector tilts as well. Only banks and insurance are shared among the top five industry group weights of both ETFs. DBEU has greater exposure to pharmaceuticals, food, and oil and gas, while DBEZ leans more heavily into semiconductors, electrical equipment, and aerospace and defense.

Even so, there is significant portfolio overlap. As of the latest data, DBEU and DBEZ share 212 overlapping holdings, representing 53.8% of DBEU’s 423 total holdings and 40.8% of DBEZ’s lineup.

Another important feature of both ETFs is their built-in currency hedging. This structure helps protect investors from the effects of a stronger U.S. dollar, which has faltered recently amid tariff fears but historically tends to be stronger than the euro, especially during periods of flight-to-safety flows when the dollar’s reserve currency status is most valuable.

Because of this, both ETFs have historically outperformed their unhedged counterparts—the iShares Europe ETF

DBEZ & DBEU Annualized Total Returns Versus IEV & EZU

DBEZ vs IEV (Date range: 2014-12-15 - 2025-05-02)

DBEU vs EZU (Date range 2013-10-01 - 2025-05-02)

Unhedged ETFs face headwinds when the dollar rises against the euro, hurting returns even if the local European markets perform well. By contrast, DBEU and DBEZ neutralize the currency impact, letting investors capture the true underlying equity performance.

The performance gap between Xtrackers’ currency-hedged ETFs (DBEU and DBEZ) and their unhedged iShares counterparts (IEV and EZU) offers a clear lesson: own European stocks, not the USD/euro currency pair.

Currency exposure is a source of uncompensated risk that can drag on returns, even when the underlying equities perform well. While the U.S. dollar has weakened year to date, you don’t want foreign exchange volatility becoming a long-term headwind to what should be a straightforward equity investment.

Please note that this article reflects the author’s personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.