Time and again this year, it has been said that U.S. stocks are the brightest developed market stars. Tell that to some of the major diversified Europe exchange traded funds.
Over the past 90 days, the S&P 500 is higher by 5.5%, exactly half the returns offered by the Vanguard FTSE Europe ETF (NYSEArca: VGK). To boot, VGK has a trailing 12-month yield of 3.28%, more than 125 basis points above the S&P 500. Investors love VGK not just because of the yield or recently stout performance, but also for the 0.12% expense ratio, which makes it cheaper than 93% of its rivals, according to issuer data.
While there are still risks when it comes to investing in Europe, VGK stands as a viable option for investors looking to participate in further upside for European equities. “While not for the faint of heart, its holdings are trading at reasonable valuations and may grow faster than their U.S. counterparts as conditions in Europe improve,” said Morningstar analyst Alex Bryan in a report.
For all the accolades, most of which are deserved, VGK may not be the Europe ETF for every investor, particularly the investor that is willing to bet it will be the Eurozone’s most downtrodden members that see their equity markets soar. [ETFs for a Eurozone Recovery]
“Top country weightings belong to the U.K. (33%), Switzerland (14%), and France (14%). The fund has limited direct exposure to the weakest members of the eurozone. For instance, together Italian and Spanish stocks account for less than 8% of the portfolio,” said Bryan.
ETFs tracking Switzerland and the U.K. have recently impressed, but neither is a Eurozone member and lack of Eurozone exposure cuts both ways. For example, the SPDR EURO STOXX 50 ETF (NYSEArca: FEZ) only has exposure to seven nations, all of which are Eurozone members. France and Germany combine for about 69% of FEZ’s weight. [Fundamentals Looking up for Europe ETFs]
That factoid is meaningful because FEZ has outpaced VGK by 330 basis points over the past 90 days. FEZ is not cheaper in terms of fees (0.29%), but it is cheaper on valuation. It has a P/E ratio of 13.7 compared to 19.1 for VGK. h
Part of the reason for the lower valuation is that FEZ is not excessively allocated to expensive defensive sectors. Staples, telecom and utilities combine for less than 22% of the fund’s weight. [Playing Defense Isn’t Cheap]
Neither FEZ nor VGK offers a euro hedge, so investors looking to hedge their currency exposure can complement positions in FEZ or VGK with an such as the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ).
Not only does HEDJ feature the currency hedge component, but it is Eurozone-centric with 99.28% of its weight going to Eurozone member states. Do not underestimate HEDJ’s 17.4% weight to the Netherlands, far higher than what is found in FEZ or VGJ. Dutch stocks have been among Europe’s best performers this year. [Buyers go Dutch With This ETF]
Vanguard FTSE Europe ETF
ETF Trends editorial team contributed to this post.