The Vanguard FTSE Europe ETF (VGK) has quickly become one of the standout performers in 2025, posting a remarkable 25% gain year-to-date, well above many U.S.-focused ETFs.
Unlike funds that concentrate solely on American equities, VGK offers investors a broad, diversified exposure to European companies across industrials, financials, consumer goods, and defense sectors. Its performance has been fueled by strong sector rotation, as investors increasingly favor industries benefiting from economic recovery in Europe.
Rising EU defense spending, improving corporate earnings, and strategic fiscal policies in major economies like Germany and France have further bolstered the fund. Brokers from Aurudium examine the multiple drivers behind VGK’s success and explore whether these favorable conditions, combined with low turnover and disciplined portfolio management, could sustain its momentum into 2026, making it a compelling option for investors seeking international diversification.
Why VGK Has Soared in 2025
The Vanguard FTSE Europe ETF holds shares across Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Its performance this year has been largely fueled by a rotation of global investors into industrial and financial sectors, which account for 43.6% of the ETF’s portfolio.
Industrial stocks have benefited from rising defense spending in Europe, driven by geopolitical tensions and policy initiatives from NATO and the European Union. The European Defense Agency reported that military expenditures reached $402 billion in 2024, and this figure is expected to climb to $446 billion in 2025, creating tailwinds for companies within the ETF.
Financial services stocks have also been a key driver. European banks in the VGK portfolio have navigated lower interest rates effectively by boosting noninterest income and increasing trading profits, helping offset the negative impact of historically low central bank rates.
Since June 2024, the European Central Bank has cut its benchmark lending rate by more than 50%, presenting challenges that certain banks have managed to convert into profitable opportunities.
Is This Momentum Sustainable?
With 2025 nearing its end, investors are questioning whether the Vanguard FTSE Europe ETF can continue its strong performance into 2026. Many analysts note that several factors suggest potential for ongoing upside.
Eurozone industrial and financial sectors are projected to see strong earnings growth next year, according to forecasts from J.P. Morgan. Additionally, increased fiscal spending in Germany, the region’s largest economy, may catalyze growth in German equities.
French stocks, which comprise a significant portion of the ETF, are also trading at discounted valuations relative to the Euro Stoxx 50, presenting potential upside for investors seeking value plays.
Combined, French and German equities make up almost 29% of VGK’s portfolio, giving investors exposure to the two largest contributors to the fund’s growth. Furthermore, the fund’s low turnover rate of 3.4% in 2024 indicates that its holdings are relatively stable, allowing investors to benefit from consistent exposure to top-performing companies rather than frequent portfolio reshuffling.
Broader Implications for Investors
The performance of the Vanguard FTSE Europe ETF illustrates how geographic diversification can pay off, particularly when markets outside the U.S. experience sector-specific recoveries. Investors seeking to hedge against potential U.S.-centric market volatility or explore growth opportunities in Europe may find VGK to be a compelling choice.
The fund’s focus on industrials and financial services, combined with the structural tailwinds of defense spending and bank profitability, makes it an example of how macroeconomic trends can influence ETF performance. For investors weighing international exposure, understanding the drivers behind VGK’s 2025 performance is crucial for making informed decisions.
Key Considerations
While VGK has performed impressively this year, brokers caution that international markets carry inherent risks, including currency fluctuations, geopolitical tensions, and policy changes in the EU. These factors could impact returns and should be considered alongside historical performance.
For long-term investors, the Vanguard FTSE Europe ETF presents a blend of growth and stability within European markets, backed by a diversified portfolio and exposure to sectors positioned to benefit from ongoing economic trends. As always, careful monitoring and understanding of the fund’s underlying holdings are essential to manage risk effectively.
Conclusion
In summary, the Vanguard FTSE Europe ETF (VGK) has emerged as the top-performing Vanguard fund in 2025, fueled by a combination of sector rotation, rising European defense spending, and resilient financial services. Wile past performance is no guarantee of future results, the structural tailwinds and stable portfolio composition suggest that VGK could continue to be an attractive option for investors seeking international exposure and growth potential in the coming year.
