This Country's Stock Market Cannot Be Ignored

Key Points

• Germany's economy is doing well due to fiscal stimuli.

• There's a great ETF that investors can use to gain exposure to the company's red-hot market.

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U.S. stocks are doing relatively well as of September 4, up by 10.6% year to date. That's right in line with the average annual gain of about 10% for the S&P 500 index since that benchmark's 1957 inception.

That's not bad at all, considering that the index posted robust gains of more than 23% both last year and the year before. But this year, another nation's stock market is outperforming the American market... by a lot.

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I'm talking about Germany. The DAX index, the benchmark and barometer for that nation's economy that tracks 40 German blue-chip companies trading on the Frankfurt Stock Exchange (analogous to the all-American S&P 500), is up about 17% this year, almost twice the gain of the S&P 500. And the broader MSCI Germany index, which tracks 54 large and mid-cap stocks, is up about 35% in 2025.

There may well be much more upside to come. German stocks look to move higher into next year, as profits for the nation's companies in 2026 are forecast to rise 14%, slightly higher than the projected earnings growth for the S&P 500. Always remember that share prices ultimately follow earnings growth.

The German economy

Germany is an economic and industrial powerhouse. Its gross domestic product of about $4.4 billion makes it the largest economy in Europe and the third largest in the world behind the U.S. and China.

The Reichstag building, seat of the lower house of Germany's legislature. Image source: Getty Images.

So, what's driving German stocks higher right now?

There are several factors. A major one is a recently enacted huge federal spending package of some 500 billion euros (about $582 billion) for infrastructure across the country, as well as legislation that removed the so-called "debt brake" on defense spending, which is driving an expansion of military and defense manufacturing and cybersecurity investment.

A less discussed factor is the growing popularity of investing among Germans. For decades after the hyperinflation of the 1920s, many people in the nation harbored a level of risk aversion that caused them to avoid the stock market. But that's finally changing, and the number of Germans who own equities is up 44% over the past decade. So savings flowing into the stock market have given German equities an added lift.

And the European Central Bank, which controls the money supply for the European Union (which includes Germany), has been steadily cutting its key interest rate since June 2024, from 4% to 2%. That monetary stimulus is providing an extra boost to company revenue and profits across the E.U.

Investing in German stocks

One way to gain exposure to the German economy is through the iShares MSCI Germany ETF (NYSEMKT: EWG), which tracks the MSCI Germany Index and covers about 85% of Germany's total stock market. That exchange-traded fund rose almost 10% last year and more than 23% in 2023.

The fund's assets under management are about $2.8 billion, and its top four holdings are:

• SAP (NYSE: SAP), an information technology company, accounts for 14.5% of assets.
• Siemens (OTC: SIEGY), an industrial conglomerate, at 10.8%.
• Allianz (OTC: ALIZ.Y), a financial services provider, 8.4%.
• Deutsche Telekom (OTC: DTEGY), a telecommunications giant, 6.6%.

No other stock in the fund accounts for more than 5% of the assets, which makes it relatively diversified and a good proxy for the German economy.

The ETF is up 31% in 2025, and its expense ratio is 0.5%, which is considered about average for an ETF.

Generally speaking, investors need to diversify their portfolios. That means putting your money into a mixture of growth and value stocks, and ideally also includes a mix of U.S. and international stocks. Germany's market is soaring, and the iShares MSCI Germany ETF is a great way to participate in that ascent.

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Matthew Benjamin has positions in iShares MSCI Germany ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.