S&P 500 has been languishing and chopping since the beginning of the year. European markets has a first lit under it since ECB announce that it will do whatever it take to save the Euro and implement the European QE. European equity markets has vastly outperformed the US.
The economy has been stabilized and the market is recovering. Funds has gradually shifted back to the Eurozone region and there are number of investment options at investor fingertips to take advantage of the recovery.
We list 3 approach investors can take to profit from the European economic stabilization and recovery with Exchange Traded Funds. (On a sector basis global Solar sector is also bouncing back – see our Solar ETF list)
Types of Europe Exchange Traded Funds
1. Broad European Market Index (Traditional Index Funds)
2. European Financial ETF (Sector specific focus)
3. Individual Country ETFs
4. Leveraged European ETF (Leveraged play on the recovery)
Best European ETF – full steam ahead
A broad diversified market index funds is a bread and butter for passive investors. Large and low cost Europe index funds allow investors to track the return of the market without the risk of underperformance (excluding tracking error and fees). The downside of index fund investing is there is no chance of outperforming the market. Tracking the market is preferred for risk averse investors to capture the systematic risk rather the risk of individual stocks. Conservative investors should follow our guide on how to incorporate international ETF in your portfolio.
Limited inflationary pressure in Europe has loosened pressure on the European Central Bank to loosen monetary policy and support the economic recovery. Chart below highlight the European equivalent of the Dow Jones Index, the STOXX 50 which has handily beaten the return of the Dow or S&P 500 over the same timeframe.
- STOXX 50 includes 50 largest European companies listed across the EU.
Best European ETF List
|European Index Funds|
|Vanguard FTSE Europe||VGK|
|iShares MSCI EMU ETF||EZU|
|SPDR Euro Stoxx 50||FEZ|
|iShares MSCI Germany||EWG|
|iShares MSCI United Kingdom||EWU|
|iShares MSCI France||EWI|
The European ETF list highlights largest European market index funds with each ETF providing a specific market exposure for investor.
Vanguard FTSE Europe (VGK) and iShares Europe (IEV) are both large cap focused exchange traded funds. VGK includes 493 largest European companies and IEV includes 350 large cap across 18 countries.
- STOXX 350 can be seen to be similar to the S&P 500 which includes a larger set of listed companies.
While there is not a major difference in the sector exposure between VGK and IEV. There is a big difference in the fee structure of the large cap Europe ETF measured by the expense ratio. IEV is almost 4 times as high at 0.60% compared to VGK of only 0.12% of asset under management.
iShares MSCI EMU (EZU) and SPDR Euro Stoxx 50 (FEZ) also tracks the multiple European stock markets but with a twist to VGK and IEV. 45% of VGK and IEV market exposure are concentrated in United Kingdom and Switzerland which EZU and FEZ avoids. While both funds are market cap weighted, EZU includes over 340 stocks. FEZ on the other hand tracks the STOXX 50 which includes 50 largest European companies.
European Financial ETF – Sector Highlight
|iShares MSCI Europe Financials Sector Index ETF||EUFN|
|First Trust STOXX European Select Dividend Index Fund||FDD|
As the European markets lagged the US and Japan. Leverage of the European banks going into the financial crises was much higher than the US financial institution that got into trouble. Post crises, they have struggled to maintain capital ratios that satisfy the regulators and are still playing catch up to financials in our developed markets.
For contrarian investors thinking that the worse is finally out of the financial sector then iShares MSCI Europe Financials (EUFN) which is a pure European Financial ETF. EUFN has lagged VGK by half in the last 5 years however given the current value seen in the sector it can be used to ride the resurgence of financial services.
Analysis of EUFN shows Banking Services make up more than half of the fund with insurance at almost 30% of the insurance and investment banking at 10%. Remaining AUM of the fund is portioned between Real Estate and holding companies.
Not surprisingly, the usual suspects of countries with large financial service sectors are represented heavily in EUFN. UK makes up to 31% of the ETF, followed by Spain (11.5%), France (11%) and Switzerland (11%). 66% of the ETF asset is spread across these 4 countries.
|European Financial ETF (EUFN) Country Allocation||Percentage|
Individual European Country ETF
There is also a number exchange trade funds that tracks country specific index rather than broader the broader European markets. We included just the major economies of most interest for investors; France, Russia, United Kingdom and Germany ETFs.
One point investors should note are these are large cap and concentrated ETFs with more than 50% of the fund in just the top 10 positions.
Leveraged European ETF – double the return with higher risk
For investors that are at the higher end of the risk spectrum, a leveraged play through European leverage ETF can be used to hyper charge the portion of the portfolio allocated to European equities.
Barclays ETN+ FI Enhanced Europe 50 ETN (FEEU) technically is not a exchange fund but an exchange note. An exchange note is a liability by the issuer which promises a return based on a pre defined criteria. FEEU promises to return 2x the daily return of the DAX 50. Investors should note FEEU return is based on daily return which does not include effect of compounding.
For patient investors investing in moving asset allocation back to Europe can pay off if patience and the trend continues. With unemployment and growth flattening, a bottom looks more likely than not.
List of 50 Stocks in DAX, the weight in the index and the sector they operate in is below.
|Bayer AG||4.81%||Health Care|
|Banco Santander S.A.||3.97%||Financials|
|Anheuser-Busch InBev SA||3.72%||Consumer Staples|
|Daimler AG||3.62%||Consumer Discretionary|
|Unilever NV Cert. of shs||2.74%||Consumer Staples|
|SAP SE||2.70%||Information Technology|
|BNP Paribas SA Class A||2.63%||Financials|
|Banco Bilbao Vizcaya Argentaria S.A.||2.45%||Financials|
|Telefonica SA||2.33%||Telecommunication Services|
|ING Groep NV Cert. of Shs||2.23%||Financials|
|Deutsche Telekom AG||2.18%||Telecommunication Services|
|LVMH Moet Hennessy Louis Vuitton SE||1.92%||Consumer Discretionary|
|Intesa Sanpaolo S.p.A.||1.86%||Financials|
|L’Oreal SA||1.83%||Consumer Staples|
|Air Liquide SA||1.75%||Materials|
|Schneider Electric SE||1.73%||Industrials|
|Deutsche Bank AG||1.72%||Financials|
|Danone SA||1.67%||Consumer Staples|
|Airbus Group NV||1.54%||Industrials|
|Societe Generale S.A. Class A||1.54%||Financials|
|Volkswagen AG Pref||1.53%||Consumer Discretionary|
|Bayerische Motoren Werke AG||1.52%||Consumer Discretionary|
|ASML Holding NV||1.39%||Information Technology|
|Industria de Diseno Textil S.A.||1.33%||Consumer Discretionary|
|GDF SUEZ SA||1.32%||Utilities|
|Orange SA||1.28%||Telecommunication Services|
|Munich Reinsurance Company||1.28%||Financials|
|Vivendi SA||1.27%||Consumer Discretionary|
|Deutsche Post AG||1.22%||Industrials|
|Nokia Oyj||1.12%||Information Technology|
|Royal Philips NV||1.05%||Industrials|
|Assicurazioni Generali S.p.A.||1.03%||Financials|
|Essilor International SA||1.01%||Health Care|
|Compagnie de Saint-Gobain SA||0.85%||Industrials|
|Carrefour SA||0.85%||Consumer Staples|