Good time to invest in Europe? 3 fund ideas

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

For those who have not altered their portfolio, they will likely still have a high exposure to the US stock market - it is a side-effect of a long period of higher US returns. 

To highlight this point, consider the make-up of a global fund. The Legal & General Global Equity Index, from our Select 50 list, is an example. The chart below shows that 68% is invested in the US and less than 12% in Europe.

Pros and cons for investing in European stock markets

Europe is likely to make up a similar slice of portfolios to that of the global tracker above. Yet the continent is a powerhouse of an economy with the single market of the eurozone at its heart. Consider some eurozone stats, sourced from the European Central Bank:

• The eurozone is home to 351m people - 5% of the global population and more than the 337m people who live in the US.
• Eurozone GDP makes up 11.9% of world GDP compared to 14.8% for the US and 3.4% for Japan.

Europe is also home to leading brands in some of the world’s biggest industries - France’s LVMH, Dior and Hermès in luxury goods, Germany’s Volkswagen, Mercedes and BMW in cars and Switzerland’s Novartis and Roche in healthcare.

There are several good reasons to consider investing in Europe now. For one, European stock markets look cheap compared to other regions, especially the US (more on this below). But also, the tariff war demonstrated that confidence in the supremacy of the US stock market can be shaken. More recently, the US government has faced criticism for exerting pressure on the Federal Reserve to reduce interest rates. These developments risk undermining confidence among international investors.

Meanwhile, European economies are now stabilising after a series of crises, from the war in Ukraine to the soaring cost of energy. Lower borrowing costs are also helpful to companies with the prospect of further interest rate cuts to come.

Some uncertainty remains, particularly surrounding Ukraine. And as an area mostly made up of advanced economies, there is less room for growth than in other parts of the world. Investors with an appetite for risk may want to look further afield for strong growth opportunities.

Europe vs the US

Europe had registered the third best start to a year for Europe vs US in more than half a century, registering 22% outperformance to the end of April, according to Schroders. But much has changed. Now, the S&P 500 is up 10.5%, marginally ahead of the Europe STOXX 600's 9.1% gain. It is worth noting that there have been notable pockets of very strong performance in Europe: Italy's MIB is up 24% in 2025 and Spain's Ibex 35 is 30% higher (figures from Refinitiv, 28 August.

How cheap is Europe?

Aside from the other reasons to invest, or not invest, valuation is critical. And Europe looks far cheaper than the US. That’s understandable given the decade-plus of bumper returns achieved by the New York stock market, particularly among technology companies; valuations have been stretched for a while. And even with the volatility in 2025, American shares still look expensive.

The basic measure is to compare prices with earnings. The US is on a forward price-to-earnings ratio of 28. This is not only much higher than 17 for Europe but it also 33% above its 15-year average, according to analysis by Schroders.

• What is the price-to-earnings ratio and how do you calculate it

The table below sets out the p/e ratios for each investment region and shows in brackets the percentage above or below the 15-year average.

The second column introduces a more sophisticated version of the P/E ratio known as CAPE (the cyclically adjusted price to earnings ratio). This smooths out the ups and down of the business cycle which, its fans say, makes it is a better measure. Again, Europe’s number, at 20, is far lower than the remarkable 37 figure for the US. But it is also 8% above its long-run average.

Finally, the third column shows dividend yield, with higher income hinting at better value. Europe offers the second highest income of the investment regions shown.

Source: Schroders Equity Lens. Figures to 31 July 2025 (above or below the 15-year historic average is shown in brackets)

How much of your portfolio should be in Europe?

It may be rash to panic-sell US holdings to shift money across the Atlantic. The US remains an extremely large and dynamic economy. It plays host to some of the most profitable and promising companies on the planet.

There are also several potential headwinds to be wary of when it comes to Europe. The war in Ukraine is an obvious one, but concerns like the increased cost of living have not gone away.

The best portfolio is a well-balanced one, spread across a range of regions and sectors. Don’t forget that different funds often invest in similar companies. You can check the overlap with our X-ray tool. We explain how to do that here: tools that can make you a better investor.

How to invest in Europe

Although there are fewer funds, investment trusts and ETFs (exchange-traded funds) available to those looking to invest in Europe compared to the UK or the US, the number of choices can be bewildering.

Our Select 50 list narrows down the choice. Here are a few options for you to consider:

Barings Europe Select Trust

This fund aims to deliver growth by investing in smaller companies. Its remit is Europe, excluding the UK. It has 97 holdings with around a fifth of the fund invested in financial companies. Well over 60% of the fund is invested in six countries: Sweden, Switzerland, Italy, the Netherlands, France and Germany. Because of its focus on small companies, its holdings are often not household names. It currently yields 0.6% and has an ongoing charge of 0.82% a year.

• Read fund information for Barings Europe Select Trust

Schroder European Recovery Fund

The top holdings of this fund include some of the biggest companies in Europe, including Dutch bank ABN Amro and BNP Paribas of France. Swiss drugs giant Roche is also in the top 10. It follows a value investing philosophy, seeking out unloved companies. Just over 4% of the fund is currently held in cash, down from 6% in May. Its yield is 2.5% and its annual charge is 0.96%.

• Read fund information for Schroder European Recovery Fund

Vanguard FTSE Developed Europe ex UK

This is a passively-managed fund which, with an annual fee of 0.1%, is a very cheap way to get European exposure. Passive funds track and index, avoiding the cost of employing a fund manager to select shares. The fund has several hundred holdings with Louis Vuitton (LVMH), Nestle and Siemens among its top 10. Its current yield is 2.8%.

• Read the fund information for Vanguard FTSE Developed Europe ex UK

If you’ve got a burning question you want to ask, why not drop us a line? Ask us your question.

• See more Select 50 funds selected by experts
• Read: Top 10 best-selling ISA and SIPP funds this year
• Read: Investing in emerging markets - three fund picks