Why IEUR Outperformed VOO and SPY in 2025: A Case for International Diversification and Dollar Weakness

In 2025, the iShares Core MSCI Europe ETF (IEUR) delivered a staggering 33.05% year-to-date return, far outpacing the Vanguard S&P 500 ETF (VOO) and SPDR S&P 500 ETF Trust (SPY), which returned 17.44% and 17.35%, respectively. This divergence marks a rare and striking deviation from the historical parity between VOO and SPY, both of which track the S&P 500 Index. The question now is: Why did a European-focused ETF, long considered a secondary player in global equity markets, eclipse the dominant U.S. benchmarks? The answer lies in a confluence of factors-international diversification, U.S. dollar weakness, and structural shifts in global capital flows-that together reshaped the investment landscape.

The Case for International Diversification

For years, the S&P 500 has been the default choice for investors seeking broad equity exposure, driven by the outsized performance of a handful of AI-driven megacap stocks. However, 2025 revealed the risks of such concentration. As U.S. markets became increasingly dependent on a narrow subset of companies, global investors began reallocating capital to regions perceived as less volatile and more resilient. European stocks, long undervalued, emerged as a compelling alternative.

According to a report by J.P. Morgan, European markets experienced their best performance in decades in 2025, fueled by Germany's aggressive fiscal stimulus and a broader appetite for diversification. This shift was not merely about stocks-it was about rebalancing portfolios to mitigate overexposure to U.S. equities. As one analyst noted, "The S&P 500's dominance created a vacuum, and European assets filled it with a combination of competitive earnings and favorable currency dynamics."

The U.S. Dollar's Role in the Narrative

The U.S. dollar's decline in 2025 was another critical catalyst. The greenback fell by approximately 10% in the first half of the year, driven by slower U.S. economic growth, political uncertainty, and rising fiscal deficits. This weakness amplified the returns of international equities for U.S. investors, as foreign earnings-denominated in euros-gained value when converted into dollars.

Schwab's research underscores this phenomenon: a weaker dollar enhances the value of international stock returns by boosting the purchasing power of foreign earnings. For IEUR, this meant that European companies' profits, already growing due to improved earnings projections, were further inflated by favorable exchange rates. Data from Edelman Financial Engines reveals that over 60% of the MSCI Europe Index's gains in U.S. dollar terms in 2025 were attributable to the dollar's decline.

Structural Shifts and Capital Flows

The reallocation of capital into European assets was not accidental-it was systemic. As U.S. tariff policies targeted regions like China, India, and Taiwan, European markets were perceived as safer havens. This perception, combined with falling energy prices and tentative progress in Ukraine-Russia peace talks, further bolstered investor confidence in Europe.

Moreover, European-focused ETFs like IEUR benefited from record net inflows in 2025. These flows were driven by both institutional and retail investors seeking to hedge against U.S. market volatility. The euro, though trading in a sideways trend, gained momentum from ECB policy support and Germany's infrastructure and defense spending. As Mercer Advisors notes, "The dollar's decline was not just a currency story-it was a reflection of waning U.S. economic leadership and a rebalancing of global capital."

Conclusion: A New Paradigm for Investors

The 2025 performance of IEUR serves as a stark reminder of the value of international diversification. While VOO and SPY continued to deliver solid returns, their relative underperformance against a European ETF highlights the risks of overconcentration in U.S. equities. For investors, the lesson is clear: a weaker dollar and global market shifts can create opportunities in regions long overlooked.

As we move into 2026, the question is not whether international diversification matters-it is how quickly investors will adapt to a world where U.S. markets no longer dominate unchallenged.