Prediction: This Vanguard Index Fund Will Continue to Beat the S&P 500 in 2025

The Trump administration has unnerved investors with its departure from traditional trade policy. The average tax on U.S. imports fell to 2.5% under the previous administration, but the tariffs Trump has imposed or plans to impose would raise that figure to 8.4%, according to the nonpartisan Tax Foundation. That would be the highest level since 1946.

Fearing the impact of a trade war on the U.S. economy, investors have rotated away from domestic equities and into international stocks. The three major U.S. market indexes have declined year to date, including a 4% slide in the S&P 500 (SNPINDEX: ^GSPC). Meanwhile, several international indexes have generated robust returns, as detailed below:

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• The European STOXX Europe 50 index has advanced 8%.
• The British FTSE 100 index has advanced 4%.
• The French CAC 40 index has advanced 9%.
• The German DAX has advanced 15%.

Importantly, the returns above are shown in local currencies. But the U.S. dollar index has fallen over 4% year to date, meaning U.S. currency has become less valuable versus a basket of foreign currencies. Consequently, the STOXX Europe 50 has advanced 13% year to date as measured in U.S. dollars.

Investors seeking international exposure should consider the Vanguard FTSE Europe ETF (NYSEMKT: VGK), the best-performing Vanguard index fund year to date. Read on to learn more.

The Vanguard FTSE Europe ETF provides cheap and easy exposure to European stock markets

The Vanguard FTSE Europe ETF measures the performance of more than 1,200 European stocks. It is heavily weighted toward equities in the United Kingdom (24%), France (16%), and Germany (14%), the three largest economies in Europe.

The 10 largest holdings in the Vanguard FTSE Europe ETF are listed by weight below:

1. SAP: 2.4%
2. ASML Holding: 2.3%
3. Novo Nordisk: 2.1%
4. Nestlé: 1.8%
5. Roche Holding: 1.8%
6. AstraZeneca: 1.7%
7. Novartis: 1.7%
8. HSBC Holdings: 1.5%
9. Shell: 1.5%
10. LVMH Moët Hennessy Louis Vuitton: 1.5%

American stocks crushed European stocks in the last decade, but that trend has reversed course in 2025 due to uncertainty surrounding the health of the U.S. economy. Consumer sentiment in the U.S. has plummeted since December as the Trump administration has implemented tariffs on imports from several countries.

Consequently, the Vanguard FTSE Europe ETF has returned 14% year to date, while the S&P 500 has declined 4%. And that outperformance could continue in the remaining months of the year due to discrepancies in economic growth, looser monetary policy, and cheaper stock market valuations.

Image source: Getty Images.

Euro area gross domestic product (GDP) growth is forecast to accelerate into 2027, while U.S. GDP growth is forecast to decelerate through 2026. Also, the European Central Bank has cut its benchmark rate by 185 basis points and has yet to pause. But the Federal Reserve has cut its benchmark rate by only 100 basis points and has paused its cutting cycle.

Finally, European equities are relatively cheap compared to U.S. equities. The Vanguard FTSE Europe ETF trades at 14 times earnings, and earnings are forecast to increase at 10% annually in the next few years. Meanwhile, the S&P 500 trades at 22 times earnings, which are forecast to increase at 9% annually in the next few years.

The last item of consequence is the expense ratio. The Vanguard FTSE Europe ETF carries a below-average expense ratio of 0.06%. That means shareholders will pay just $6 annually on every $10,000 invested in the fund.

Here's the bottom line: The Vanguard FTSE Europe ETF is a sensible way for investors to get exposure to stock markets across Europe. The index has handily outperformed the S&P 500 year to date, and I think that trend will persist through the end of the year, especially if the Trump administration's trade policy continues to weigh on the U.S. economy.

However, even if I am incorrect about the Vanguard FTSE Europe ETF outperforming the S&P 500, Lisa Shalett at Morgan Stanley says such investments are an "inexpensive way to hedge portfolios against a potential U.S. stock market pullback." I agree wholeheartedly.

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HSBC Holdings is an advertising partner of Motley Fool Money. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML. The Motley Fool recommends AstraZeneca Plc, HSBC Holdings, Nestlé, Novo Nordisk, and Roche Holding AG. The Motley Fool has a disclosure policy.