Best European ETFs to Outperform US Market

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
Name Ticker
Vanguard FTSE Europe VGK
iShares Europe IEV
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

Name Ticker
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.

European Bank ETF

Should be called European Bank ETF?

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
United Kingdom 31.85%
Spain 11.85%
France 11.67%
Switzerland 11.13%

 

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.

Name Weight Sector
Total SA 4.90% Energy
Sanofi 4.90% Health Care
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
BASF SE 3.51% Materials
Siemens AG 3.34% Industrials
Allianz SE 3.16% Financials
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
AXA SA 2.10% Financials
Eni S.p.A. 1.95% Energy
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
Iberdrola SA 1.47% Utilities
UniCredit S.p.A. 1.45% Financials
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
VINCI SA 1.24% Industrials
E.ON SE 1.23% Utilities
Deutsche Post AG 1.22% Industrials
Enel S.p.A. 1.18% Utilities
Nokia Oyj 1.12% Information Technology
Royal Philips NV 1.05% Industrials
Unibail-Rodamco SE 1.04% Financials
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
Repsol SA 0.77% Energy
RWE AG 0.51% Utilities
Aperam SA 0.00% Materials