Published August 22, 2013
Over the past 90 days one of the best developed market destinations for ETF investors has been Europe.
The proof is in the returns. Over that time, the S&P 500 is down modestly while major Japan ETFs have been stung by a strong yen. The Vanguard FTSE Europe ETF (VGK) has gained nearly two percent while its U.S. and Japan counterparts have wilted.
In the past 30 days, the Europe ETF resurgence has become even more pronounced as seven of the top-15 ETFs over that time are single-country Europe funds. Of that group, the iShares MSCI Poland ETF (EPOL) is the lone non-Eurozone ETF.
S&P Capital IQ believes Europe is "poised to outperform as growth resumes, the ECB remains highly accommodative, and attractive relative valuations and dividend yields beckon. Last week, this positive outlook on Europe was further validated as second quarter GDP figures showed Europe had returned to growth after 18 months of recession, led by better than expected results from Germany and France."
S&P Capital IQ analyst Alec Young noted "that the MSCI Europe Index recently traded at a 12.0X the 12-month forward consensus EPS estimate, vs. 14.1X and 13.6X for the U.S. and Japan, respectively. Europe is also forecast to have strong EPS growth of 12.8%, which is better than what it seen for the U.S. and Japan. Europe also seems very attractive from a dividend yield perspective, in Young's opinion, yielding 3%, which is among the highest in the world. All of these factors make Europe a very attractive place to invest, in our opinion," said the firm in a new research note.
Among Europe ETFs, S&P Capital IQ has an Overweight rating on VGK, one of the largest Europe funds. VGK is not only alluring because of its paltry 0.12 percent annual expense ratio, but also because of its 5.5 percent trailing 12-month dividend yield.
Investors looking for more Eurozone exposure can consider pairing VGK with another fund because the Vanguard offering allocates over 52 percent of its weight to the U.K., Switzerland and Sweden, none of which are Eurozone nations.
S&P Capital IQ has Marketweight ratings on the iShares MSCI Germany ETF (EWG) and the iShares MSCI France ETF (EWQ), which are up an average of 3.6 percent over the past 90 days. Over the past month, the best-performing single-country Eurozone ETF is the iShares MSCI Austria Capped ETF (EWO), which up over nine percent. S&P Capital IQ did not mention EWO in the note.
The firm also has a Marketweight rating on the iShares MSCI EMU ETF (EZU). Home to over $3.5 billion in assets, EZU is a more explicit Eurozone plays as France and Germany combine for over 61 percent of the fund's ETF's weight.
EZU is also worth considering because of its decent allocations to smaller Eurozone nations that have been driving the region's recent rally, including the Netherlands. The Netherlands and Spain are the only other countries that have double-digit weights in EZU, which charges 0.5 percent per year.
With just 55 stocks, the SPDR EURO STOXX 50 ETF (FEZ) features a concentrated portfolio compared to rivals EZU and VGK, but S&P Capital IQ still has an overweight rating on the fund. A dividend yield of 3.26 percent and a P/E ratio of 12.3, according to State Street data, mean investors get a superior yield at a lower valuation than they would with the S&P 500.
FEZ only offers exposure to seven countries and it is not hard to miss the scant allocations to Belgium and Ireland. France and Germany dominate this ETF to the tune of nearly 70 percent of its combined weight.
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Disclosure: Author owns none of the securities mentioned here.
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