A Smart Idea For Europe Exposure

Exchange-traded funds tracking European equities are popular destinations this year for U.S. investors in search of value. Data confirm as much.

But the big take-away from the May data comes from looking under the hood, which shows that foreign assets are capturing an outsized share of investment flows. New money flowing into European stocks represented an increase of 4.4 percent in assets (on a net-long basis), compared with just 0.5 percent for U.S. stocks, said AltaVista Research in a recent note.

Diversification Pays

Investors are being rewarded for their commitments to diversified Europe ETFs, and while some eurozone markets are where the real bargains are at, ETFs with broad-based exposure to European stocks are performing well. For example, the Vanguard FTSE Europe ETF (NYSE:VGK) and the iShares Europe ETF (NYSE:IEV) are up an average of 17 percent year to date.

The theme of outperforming Europe ETFs is not relegated to traditional, cap-weighted ETFs, such as IEV and VGK. Just look at the First Trust Europe AlphaDEX Fund (NYSE:FEP). FEP, a smart beta spin on European stocks is up 21.6 percent this year.

FEP's Outperformance

FEP's 201 holdings are ranked on growth factors including three-, six- and 12- month price appreciation, sales to price and one-year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets. All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. A stock must have data for all growth and/or value factors to receive a rank for that style, according to First Trust.

FEP compares with IEV and VGK because the First Trust offering is not a dedicated eurozone ETF. Ten countries are represented in FEP, four of which are not eurozone nations. Those allocations are led by an almost 21 percent weight to the U.K. FEP's 8.5 percent weight to Switzerland is underweight the allocations to that country found in rival cap-weighed strategies, but FEP's combined weight to France and Germany is 32.4 percent. That is slightly above what is found in competing, traditional funds.

The size factor could be one of the reasons why FEP is outperforming this year. European mid- and small-cap stocks are impressing, a theme benefiting FEP with a median market value of $9.7 billion. In other words, FEP is essentially a mid-cap ETF while its rivals are heavily allocated to large caps.

Over the past five years, FEP has outpaced the MSCI Europe Index by 310 basis points while being only slightly more volatile.

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