ETFs for a European Recovery
Investors have plenty of ETF options with which to play a European turnaround.
Investing globally has been a difficult task in recent weeks. Whether it has been concerns regarding tapering of quantitative easing and the program's eventual end or news that Chinese banks are facing a liquidity crunch, riskier assets have been hammered by negative news flow. Diversified ETFs offering exposure to Europe have been no exception.
In just the past month the SPDR EURO STOXX 50 ETF (NYSEARCA:FEZ) is down almost 10% while the Vanguard FTSE Europe ETF (NYSEARCA:VGK) is off 9.1%. Still, some analysts have been bold enough to predict a European economic turnaround as soon as the second half of this year.
"The risk of increased market volatility over seasonally weak summer months exists but we would look to take advantage of any pullbacks, including this current one, to increase both cyclical positioning and market exposure," said S&P Capital IQ Chief European Equity Strategist Robert Quinn in a research note about European equities. "We have greater conviction in an earnings recovery; excess liquidity is still supportive to equity markets contrary to popular perceptions; and we expect easy monetary conditions to facilitate an additional 10% multiple expansion for the remainder of this year."
Quinn said he sees 2014 as a "credible recovery year" for Europe while noting eurozone M1 money supply leads GDP growth by three quarters, which could imply a turnaround is not far off. Investors have plenty of ETF options with which to play a European recovery.
Vanguard FTSE Europe ETF
The aforementioned VGK is one of the largest Europe ETFs and makes sense for long-term investors as its 0.12% annual expense ratio makes the ETF cheaper than 93% of comparable funds, according to Vanguard data.
Roughly 56% of VGK's weight goes to non-eurozone countries such as the UK, Switzerland and some Nordic nations. Perhaps more importantly in the event of another sovereign debt flare-up, VGK's exposure to the PIIGS nations is just 8.8% combined. S&P Capital IQ has Overweight ratings on European banks and industrials, of which VGK does offer decent exposure to. The research firm rates VGK Marketweight.
SPDR EURO STOXX 50 ETF
The aforementioned FEZ does not hold 50 stocks, but a roster of just 56 does indicate a high level of concentration. As such, FEZ has a beta of 1.3 against the S&P 500 and annualized volatility of nearly 26%, according to State Street data.
The good news is FEZ has a dividend yield of just over 4% and banks and industrials – S&P IQ's favored sectors in Europe – combine for over 35% of the ETF's weight. FEZ is also rated Overweight. The $2 billion fund has annual fees of 0.29%.
PowerShares BLDRS Europe Select ADR Index Fund (NASDAQ:ADRU)
The PowerShares BLDRS Europe Select ADR Index Fund is somewhat overlooked when it comes to Europe ETFs, but the fund has been less bad than FEZ and VGK over the past four weeks. ADRU can draw constituents from a universe of 100 stocks and is currently home to 86 familiar names including HSBC Holdings plc (NYSE:HBC), BP plc (NYSE:BP), Sanofi SA (NYSE:SNY), and Royal Dutch Shell plc (NYSE:RDS-A).
The UK and Switzerland combine for nearly half of the ETF's country weight while PIIGS exposure is limited to about 10% with no noteworthy allocations to Greece or Portugal. ADRU's underlying index, the BNY Mellon Europe Select ADR Index (INDEXDJX:BKTEUR), has slightly outpaced the MSCI Europe Index over the past five years, according to PowerShares data. S&P rates ADRU Marketweight.
iShares S&P Europe 350 Index Fund (NYSEARCA:IEV)
The $1.1 billion iShares S&P Europe 350 Index Fund is another "diversified" Europe ETF that devotes a significant chunk of its weight, over 48%, to the U.K. and Switzerland. However, the potential upside of this ETF is that its eurozone exposure is also robust as Germany and France, the region's two largest economies, combine for over 27% of the fund's weight.
With a beta of 0.67 and a standard deviation of 20.76%, IEV is less volatile than FEZ. IEV has also outperformed ADRU, FEZ, and VGK over the past month. Top holdings include Nestle (OTCMKTS:NSRGY), BP, Sanofi, and Shell. S&P rates IEV Marketweight.
WisdomTree Europe SmallCap Dividend Fund (NYSEARCA:DFE)
In what might come as a surprise to some investors, the lone small-cap fund on this list has been the best performer in this group over the past month. That means DFE's 6.2 loss is less bad than the other ETFs highlighted here. Like the other ETFs on this list, DFE is UK/Switzerland heavy with those nations representing nearly 41% of the fund's weight.
However, DFE does a good job of mixing in the eurozone's riskiest countries, such as the PIIGS, with steadier plays such as the Sweden and Norway. Industrials and financials combine for over 41% of DFE's weight, and while the ETF features a juicy 11.37% distribution yield, the fund is light on defensive dividend sectors. Staples, health care, and telecom combine for about 17% of the ETF's weight.
S&P Capital IQ rates DFE Marketweight.
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