There are 11 global industry classification sectors (GICS). But industrials are getting the bulk of the credit for boosting Europe-focused ETFs this year.

The reasoning is simple. Against the backdrop of the ongoing Russia/Ukraine war and some tough talk from President Trump, more European countries are pledging to boost defense spending. Indeed, that’s helping ETFs like the WisdomTree Europe Hedged Equity Fund (HEDJ). As is the case with many Europe ETFs, HEDJ has significant industrials exposure. To be price, it’s 23.21%, making that the ETF’s largest sector weight.

However, financial services stocks are also contributing to 2025 upside for Europe ETFs. That’s good news for those funds, many of which feature large allocations to that sector. Financials account for almost 22% of HEDJ’s roster, making that the ETF’s second-largest sector allocation.

HEDJ’s Upside Drivers

The right sector mix is one reason HEDJ is up nearly 13% since the start of 2025. But when it comes to ETFs of this ilk, geography matters, too. Germany, the eurozone’s largest economy, is home to one of this year’s best-performing equity markets among developed nations. Part of the reason for this is favorable monetary policy that’s helping banks. So it’s a good thing HEDJ devotes almost 27% of its weight to German stocks.

“First of all, on NII – Net Interest Income – definitely more optimism among banks. The yield curve has steepened more than 50 basis points since the announcement together with increased prospects of loan growth,” noted Alvaro Serrano, head of European banks at Morgan Stanley. “Accelerated loan growth is definitely improving the confidence from management teams on the median term growth outlook. I think that was the biggest takeaway for me.”

Contributions to Europe ETFs’ upside from banks may not be confined to this year. Serrano points to some regulator efforts that could be medium-term catalysts for European banks, adding that those plans could boost banks’ profitability and the strength of their balance sheets.

An uptick in capital markets activity — namely mergers and acquisitions — hasn’t materialized in force as of yet. But that could be another longer-ranging catalyst for banks held by HEDJ.

Mixed Messaging

“Clearly there, the messaging was more mixed, given the slower start to the year in the light of tariff uncertainty, which has driven a widening in bid our spread,” observed Bruce Hamilton, head of diversified financials at Morgan Stanley. “So certainly there, the messaging was a little bit more downbeat. Though in the context of a still-improving sort of multi-year recovery cycle anticipated in capital markets. So, a pause rather than a cancellation of that improvement.”

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