European Equities Roaring Back in 2025: The Vanguard FTSE Europe ETF's Impressive Rally

Why Europe’s Market Recovery Is Catching Everyone Off Guard

When investors think about the best-performing ETFs in 2025, many overlook Europe. That’s changing fast. The Vanguard FTSE Europe ETF (NYSEMKT: VGK) has surged approximately 25% year-to-date, making it one of Vanguard’s strongest performers alongside their more widely recognized all world ETF alternatives.

This isn’t just a random bounce. The European equity recovery reflects a fundamental shift in where global capital is flowing. While U.S. markets remain glued to technology and communication services, investors are actively rotating into European industrials and financial services sectors. These two segments now account for 43.6% of the Vanguard FTSE Europe ETF’s holdings.

The Defense Spending Catalyst Powering Industrial Stocks

A significant driver behind this rally is Europe’s accelerating defense spending. The European Union’s military expenditures reached an unprecedented $402 billion in 2024, but that figure is already headed higher. 2025 projections suggest defense spending will climb to $446 billion—a meaningful increase that’s reshaping European industrial companies’ order books and profit outlooks.

Geopolitical tensions with Russia, combined with pressure from NATO allies to reduce military dependence on U.S. infrastructure, suggest this trend has legs. For companies in the Vanguard FTSE Europe ETF’s portfolio, particularly those in the defense and industrial sectors, this represents a multi-year tailwind that could extend well into 2026.

Banks Find New Revenue Streams Despite Rate Headwinds

European financial institutions have navigated a tricky environment with unexpected success. The European Central Bank slashed its benchmark lending rate by more than 50% since June 2024, which traditionally pressures bank profitability. Yet many European banks held in the Vanguard FTSE Europe ETF have offset these headwinds by:

• Boosting noninterest income streams
• Capturing higher trading profits
• Maintaining solid capital positions

This adaptive strategy has helped European financials emerge as global sector leaders in 2025, providing substantial support to the fund’s overall performance.

2026 Outlook: Momentum Likely to Continue

Looking ahead to 2026, several factors suggest the European equity story isn’t over. Financial and industrial earnings-per-share growth is expected to remain robust across the eurozone, according to major investment banks. Additionally, potential increases in fiscal spending within Germany—Europe’s largest economy—could provide additional momentum for German equities.

French stocks, which comprise nearly 29% of the Vanguard FTSE Europe ETF alongside German holdings, have recently recovered and trade at attractive valuations compared to broader European benchmarks. If fiscal stimulus materializes and earnings expectations hold, 2026 could deliver a sequel to 2025’s gains.

The fund’s low turnover rate of just 3.4% for fiscal 2024 indicates stability in its holdings, suggesting any upside wouldn’t require aggressive portfolio reshuffling to capture.

How This Compares to Best All World ETF Options

For investors debating between concentrated European exposure versus more diversified best all world ETF strategies, the Vanguard FTSE Europe ETF offers a differentiated risk-reward profile. While all world ETFs provide global diversification, regional specialists like VGK allow investors to capitalize on specific recovery narratives—in this case, Europe’s defense-driven industrial resurgence and banking sector revival.

Vanguard’s position as the nation’s second-largest ETF issuer—managing 99 total funds across equities and fixed income—demonstrates why investors trust their European-focused offerings alongside broader alternatives.