The European Central Bank disappointed global financial markets last week when it merely lowered its deposit rate to -0.3 percent, not the -0.4 percent so many market participants were hoping for. Not surprisingly, the euro surged against the dollar, leaving some investors to think the near-term case for Eurozone stocks is murky at best.
Although many investors believe the recovery in Eurozone stocks has been facilitated by the weaker euro, what has gone overlooked by international investors are improving local consumption trends; so, the eurozone recovery story is more localized than some market participants believe.
The WisdomTree Europe Local Recovery Fund (BATS: EZR), which debuted in late October, gives investors a new avenue for playing an ongoing recovery in the Eurozone's three largest economies: Germany, France and Italy. In order, France, Germany and Italy combine for two-thirds of EZR's weight. EZR's 16.2 weight to Italian stocks is one of the largest among all ETFs that are not dedicated Italy funds.
EZR follows the WisdomTree Europe Local Recovery Index, which "is designed to provide exposure to European companies that are most sensitive to economic growth prospects in the Eurozone and that derive more than 50% of their revenue from Europe," according to WisdomTree.
"The Index construction process for this new Index is designed to favor more cyclical sectors and those that are more responsive to changes in the economic growth environment, using one of our favorite leading indicators of the economy: the European Commissions Economic Sentiment Indicator," said WisdomTree in a recent note.
Since it is designed to be sensitive to economic recovery, EZR is heavy on cyclical sectors with financial services, industrials and consumer discretionary combining for over 78 percent of the new ETF's weight.
"Cyclical sectors had a tendency to outperform as perceptions of economic growth improved, whereas defensive sectors had a tendency to do the same as those perceptions declined," said WisdomTree in the note. "Much of the macroeconomic work suggests that the eurozones local economic recovery is in its early stages. We believe the WisdomTree Europe Local Recovery Index is well positioned for such a growth outlook."
EZR's combined exposure to the PIIGS nations is just over 31 percent, though the new ETF features no exposure to Greece due in part to the fact that Greece is classified as an emerging market. Spain is EZR's fourth-largest country weight at 9.3 percent. U.S.-listed names found among EZR's 210 holdings include oil giants Total SA (NYSE:TOT) and Eni SpA (NYSE:E).
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