SPEU: Outperformance Versus SPY May Continue In 2026

The SPDR Portfolio Europe ETF (SPEU) has recently outperformed the S&P 500 (SPY) due to lower valuations and a weaker U.S. dollar, with its attractively valued holdings projecting potential long-term returns of 7.8%. However, its overweight allocation to cyclical sectors like financials and industrials introduces downside risks during economic downturns, while U.S. investors face additional considerations regarding currency risk and geopolitical instability from the Ukraine war.

Analysis

The SPDR Portfolio Europe ETF (SPEU) has recently outperformed the SPDR S&P 500 ETF (SPY), a dynamic attributed to a combination of lower valuations in European equities and a weak U.S. dollar. Looking forward, the analysis suggests SPEU's holdings remain attractively valued, with the potential for long-term returns to reach 7.8% contingent on European GDP growth meeting its potential. However, significant risks temper this outlook. SPEU is overweight in cyclical sectors such as financials and industrials relative to SPY, heightening its vulnerability to downside volatility during economic recessions and equity bear markets. For U.S. investors, additional layers of risk include currency exposure, where a strengthening dollar would act as a headwind, and geopolitical instability related to the ongoing war in Ukraine.

Key Decisions for Investors

• Investors with a bullish view on the European economy and who anticipate continued U.S. dollar weakness could consider SPEU as a tactical allocation to capture value from its lower valuations and a potential 7.8% return.
• Given its heavy concentration in cyclical sectors, investors should closely monitor European macroeconomic indicators and be prepared to reduce exposure during signs of an economic downturn to mitigate downside risk.
• U.S. investors must actively manage currency risk and consider the geopolitical instability from the war in Ukraine as key factors that could negatively impact returns, independent of the performance of the underlying equities.