Spain ETF Outperforms S&P 500 with Low Valuations and Decent GDP Growth

The iShares MSCI Spain ETF (EWP) has outperformed the SPDR S&P 500 ETF (SPY) in 2025, gaining around 45%. The ETF's performance is attributed to Spain's low valuations and decent GDP growth, despite recent Euro strength driving a third of the gains.

The iShares MSCI Spain ETF (EWP) has significantly outperformed the SPDR S&P 500 ETF (SPY) in 2025, with gains of around 45%. This impressive performance can be attributed to Spain's low valuations and decent GDP growth, despite the recent Euro strength contributing to roughly a third of the gains [1].

The EWP ETF, which invests in large-cap Spanish stocks, has seen its holdings trade at an attractive trailing P/E ratio of 11.65x. This valuation is particularly appealing given the Financials sector overweight position, which currently accounts for 40.72% of the ETF's assets. However, the concentration in this sector also exposes EWP to potential downside risks if GDP growth falls short of expectations [1].

The Spanish economy is forecast to slow down in the coming years, with GDP growth projected at 2.4% in 2025 before settling at 1.8-1.7% in 2026-2027. Despite this expected slowdown, Spain's GDP growth remains healthy compared to the rest of the Eurozone and is comparable to the long-term GDP growth rate expected for the United States [1].

The EWP ETF offers a current dividend yield of 2.92%, with dividend growth surging over the past year. However, earnings and dividend growth are expected to slow down significantly over the next 1-2 years due to the significant Financials sector overweight and recent rate cuts by the ECB [1].

Looking ahead, the EWP ETF's payout ratio stands at about 35%, leaving a healthy 65% retention ratio for future earnings growth. After the one-off impact of lower interest rates, the ETF's earnings are expected to grow by about 5.5% annually. This takes the total expected return to about 14% in Euros, while U.S. investors may see a return closer to 15-16% in U.S. dollars [1].

Despite the strong performance so far in 2025, the EWP ETF faces risks, including elevated concentration in individual companies and sectors. The lack of exposure to Information Technology and other sectors also makes the ETF's earnings growth dependent on the business cycle rather than secular drivers such as AI and automation.

In conclusion, the iShares MSCI Spain ETF has delivered exceptional returns so far in 2025, driven by low valuations and decent GDP growth. While the ETF faces risks from concentration and sector exposure, its current valuation remains appealing, making a Buy rating justified.

References:
[1] https://seekingalpha.com/article/4799999-ewp-etf-spain-offers-low-valuations-and-decent-gdp-growth