S&P Likes 2 ETFs For Europe's Rebound

Coming off a surprisingly strong performance in 2012, European equities, broadly speaking, still sport favorable valuations and are showing the potential to deliver solid returns this year. On that note, S&P Capital IQ Chief European Equity Strategist Robert Quinn says European bourses have the potential to deliver returns in the high single digits this year.

Regarding specific eurozone nations and the corresponding ETFs, investors face an array of choices and risks. For example, some investors might be apt to say the iShares MSCI Spain Index Fund (NYSE:EWP) and Spanish equities are cheap for a reason and the reason is not good.

German stocks and ETFs such as the iShares MSCI Germany Index Fund (NYSE:EWG) and the Market Vectors Germany Small-Cap ETF (NYSE:GERJ) have been impressive, steady performers.

Additionally, some investors see opportunity in Italy with the iShares MSCI Index Fund (NYSE:EWI) on the basis that the worst news affecting Italian stocks has already been priced in.

In a new research note, S&P Capital IQ highlights three factors that could affect European equities this year and next year: The banking system, public policy and household capacity.

"Funding markets have opened up and a return to an estimated 4% global GDP growth rate in 2014 (from 2.5% currently) is not unreasonable to S&P Capital IQ and would likely have a material positive impact on consensus EPS revisions for the European banking industry," the research firm said in the note.

S&P Capital IQ put the spotlight on two ETFs investors can use to gain exposure to an ongoing recovery in European stocks. The firm rates the $1.3 billion iShares S&P Europe 350 Index Fund (NYSE:IEV) Marketweight, noting that five of the ETF's top-10 holdings earn Buy or Strong Buy ratings from S&P analysts.

Home to 355 stocks, IEV is not as intimately levered to a eurozone recovery as its name implies. Alone, the U.K. accounts for 34 percent of the fund's weight. Non-eurozone nations Switzerland and Sweden combine for another 18 percent. However, IEV does offer exposure to a possible bounce in European bank names as that sector is the ETF's largest with an allocation of over 20 percent.

IEV's top-10 holdings include Nestle (OTC:NSRGY), HSBC (NYSE:HBC), BP (NYSE:BP), Royal Dutch Shell (NYSE: RDS-A) and Total (NYSE:TOT). With a trailing 12-month yield of almost 3.1 percent, IEV has gained over 10 percent in the past 90 days.

S&P Capital IQ is even more enthusiastic about the SPDR EURO STOXX 50 ETF (NYSE:FEZ), which the firm rates Overweight. With almost $1.5 billion in AUM, FEZ is less expensive than IEV with annual fees of 0.29 percent compared to 0.6 percent for IEV.

At the country level, FEZ offers a stark contrast to IEV as France and Germany combine for nearly two-thirds of the former's weight. Spain and Italy combine for another 21 percent of FEZ's weight. FEZ is also heavier on banking stocks as that sector garners a 25.7 allocation.

Following financials, there is some balance between weights to consumer staples, health care, industrials, energy and discretionary names. Total, Sanofi (NYSE:SNY) and Banco Santander (NYSE:SAN) are found among the ETF's top-10 holdings.

FEZ has a 30-day SEC yield of 2.61 percent and has returned 12.5 percent in the past 90 days.

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