'Trumponomics' Looks Like a Gift to European ETF Investors
European ETF investors get the edge in the early rounds of a trade war sparked by President Trump's tariffs.
While the "United States versus the rest of the world" trade battle is in its early stages, Europe appears to be the big beneficiary so far.
The reasons for tariffs levied by the U.S. against our biggest trading partners remain murky. While cutting fentanyl smuggling was cited early on, Treasury Secretary Scott Bessent recently said they are aimed at leveling the global economic playing field and boosting U.S. prosperity.
The tariffs regime, likewise, has shifted almost daily, with new threats and implementations aimed at and coming from Mexico, Canada, Europe and China. Whether or not Americans understand why they are being put in this place seems unclear. The clear result has been whipsawing U.S. markets, spiking volatility and uncertainty—the most hated of elements for markets.
European ETFs for the Win
European ETF investors seem to be catching the break here, and the long-standing conventional wisdom about the superiority of investing in American markets for the moment is upended.
JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS) both boosted their European growth outlooks in recent days, and Goldman cut its U.S. GDP outlook to a 1.7% gain for the year from 2.4%. The banks said U.S. growth will be pinched by the White House boosting levies on goods from our biggest trading partners and allies.
The banks also said that European growth, while not stellar, will be boosted by lower borrowing costs in Germany and increased defense spending due to Trump cutting Ukraine aid and pushing the continent to spend more on defense.
Europe has also hit back, promising new levies on Kentucky bourbon and Harley-Davidson Inc. (HOG) motorcycles.
Impact on ETF Investors
What has been the impact for ETF investors? According to Morningstar, European investors pulled money from U.S. equity ETFs in February for the first time since May 2023.
U.S. equity ETFs based in Europe recorded $514.7 million in outflows during February, according to Morningstar Direct data. This reversal came despite an increase in overall European ETF inflows to $35.3 billion during the same period.
The biggest U.S.-issued European ETF, the $20.6 billion Vanguard FTSE Europe ETF (VGK) has gained 12% this year and net inflows of $2 billion. The broad U.S. equity SPDR S&P 500 ETF Trust (SPY) has dropped 5%. The fund, 30 times the size of VGK at $602 billion, has pulled in a relatively paltry $4.5 billion.
