Wallflower no more: European ETFs step into the sun amid trade turmoil

Globe and Mail

7 hours ago

European equity exchange-traded funds are top performers this year as Canadian investors who are putting their elbows up amid worldwide tariff turmoil seek to reduce their exposure to the U.S. market.
Stocks across the pond are offering significant value for money, bolstered by deep discounts relative to their U.S. counterparts, a strengthening euro, supportive fiscal and monetary policies, and, as of this month, the tariff agreement between the European Union and the United States. Sale prices in Europe started attracting investors early this year, with equities trading at a 30- to 35-per-cent discount to U.S. stocks – a valuation gap that remains to this day.
'European equity ETFs have been standout performers in 2025,' says Maddy Griffith, an institutional portfolio manager with CI Global Asset Management in Toronto.
She wrote in an internal May report that European equities have gone from 'a global afterthought' to producing 'their strongest relative outperformance versus U.S. markets in 25 years.'
For example, MSCI Europe, an index that tracks large- and mid-capitalization European stocks, has risen about 20 per cent in the first half of this year, while its U.S. counterpart, the MSCI USA Index, increased approximately 3 per cent.
The turnaround has continued despite – and perhaps partly because of – U.S. President Donald Trump's April 2 'Liberation Day' announcement of heavy tariffs on key trading partners including the European Union. The threats prompted some investors to cut their U.S. equities holdings, further benefitting European stocks, says Yves Rebetez, an ETF analyst with Arbutus Partners in Calgary.
'If you look at the relative performance since 'Liberation Day' in particular, the European markets which had been lagging the U.S. market for years in a row had a strong tailwind, and in fact you have had money flowing out of U.S. exposure into Europe.'
Today, with a 15-per-cent tariff ceiling on most E.U. exports to the United States as of Aug. 1 (down from a threatened 30 per cent), Europe now has relative trade certainty and can focus on fundamentals including: stronger performance beyond banks and defence stocks; the impact of a €1-trillion ($1.6-trillion) German package to stimulate its economy; and the continued hefty price-to-earnings discount of equities relative to the United States.
Export-heavy European sectors poised to benefit from underlying positives include luxury goods, semiconductors and autos, according to a recent report by asset manager BlackRock. As well, increasing fiscal stimulus to defence, infrastructure and modernization is expected to fortify Europe's industrial and technology sectors.
Ms. Griffith notes that even with a summer rebound for U.S. markets, European equities are still outperforming year-to-date, particularly for unhedged Canadian ETF investors who have received an extra boost from the strengthening euro. Hedged funds offer more stability, while the unhedged variety accentuates gains and losses.
'Europe's credible policy momentum, relative value, and shifting capital flows continue to apply. If anything, the events since May such as robust inflows into European funds and ongoing valuation discounts reinforce the case for rebalancing into Europe.'
Canadians are in general notoriously overinvested in domestic markets and, to a lesser extent, in U.S. equities and have less exposure to Europe than they should for a well-balanced portfolio, Ms. Griffith says.
Roughly half the holdings of the typical Canadian investor are in domestic stocks even as Canada represents only about 3 per cent of the global equity market. The Canadian stock market is heavily weighted to the financial, energy and industrial sectors. By adding European equities, Canadian investors gain exposure to categories such as health care and pharmaceuticals, technology, semiconductors, infrastructure and construction, consumer and retail, chemicals, machinery, and automotive.
Ms. Griffith says the level of European exposure depends on each investor's individual goals but highlights that the continent represents 15 to 20 per cent of international equities. Most Canadians' holdings are well below that percentage.
'Overall, nothing on the horizon suggests reducing exposure. If anything, the combination of underownership, improving fundamentals and macro tailwinds still supports a healthy allocation to the region.'