In what is turning into a banner year for Europe exchange traded funds, there are several standouts, but the Vanguard FTSE Europe ETF (NYSEArca: VGK) seems to occupy the hearts and minds of scores of advisors and investors.
VGK is up 20% year-to-date and has hauled in $6.25 billion in new investments, making it the fourth-best ETF of any type by that metric. Vanguard only charges 0.12% per year to own VGK, making it cheaper than 93% of rival funds, according to issuer data. All those of are important and nice statistics, but none should imply VGK is the “best” diversified Europe in terms of returns.
In fact, some savvy advisors have embraced rivals to VGK and have done so with superior results. One of those alternatives is the $4.43 billion SPDR EURO STOXX 50 ETF (NYSEArca: FEZ).
“We got to FEZ in a few ways,” said Stephen Murray, portfolio manager at New Hampshire-based Harvest Capital Management, in an interview with ETF Trends. “We wanted to focus on the Eurozone, so VGK got knocked out because of its large U.K. weight.”
Murray’s point is a vital one when it comes to evaluating Europe ETFs. Funds such as VGK and the iShares Europe ETF (NYSEArca: IEV), also up 20% this year, are far from being explicit Eurozone plays. Those ETFs have been bolstered by large weights to the U.K. and Switzerland, two countries that combine for nearly half of VGK’s weight.
Another 7.8% of VGK is allocated to Nordic countries that are not Eurozone members, but with previously controversial Eurozone stocks recovering and still cheaper than their U.S. and U.K. peers, according to Murray, investors may not want to be skimping on the region’s equities. [Europe’s P/E Ratios Can Keep Recovering]
“We’re starting to see some mean reversion between U.S., U.K. and Europe stocks, so FEZ is morphing into a play on global growth,” said Murray whose firm owns $11 million worth of the ETF. “If you’re believing Europe will turn around, FEZ is a play on that rebound and global growth. The trade still has legs.”
Murray could be right about the FEZ trade having room to run. Goldman Sachs is forecasting another strong year for European stocks in 2014 and FEZ has recently been separating itself from its rivals in noticeable fashion. [Goldman Bullish on Europe, Japan]
FEZ allocates a combined 69.3% of its weight to France and Germany, indicating the ETF is not chock full of the Eurozone’s riskiest economies. Spain and Italy combine for 20%, but other than that, the ETF’s PIIGS exposure is scant.
Over the past 90 days, FEZ has outpaced VGK by 420 basis points. Then again, FEZ topping ETFs that lean on the U.K. and Switzerland is not a new phenomenon. FEZ tops its Vanguard rival year-to-date, over the past year and past two years.
“People get in on the Europe trend and see that VGK is large, cheap and trades a lot, but if you’re looking for the discounted assets, the Eurozone is the way to play it,” notes Murray.
Murray noted that FEZ can be used as a satellite position to EFA funds like the iShares MSCI EAFE ETF (NYSEArca: EFA) to take the view that the British pound could rise more in the near-term against the dollar than the euro will. EAFE ETFs are usually U.K.-heavy. [Chart of the Day: Developed Markets ETFs]
Still, FEZ is the way to play a legitimate Eurozone rebound.
“FEZ will ride the wave of global economic growth,” said Murray. “Europe has some catching up to do. If you’re buying Europe because it’s cheap and that’s your thesis, knock out VGK on your first pass.”
Harvest Capital Management also owns shares of the WisdomTree Europe SmallCap Dividend Fund (NYSEArca: DFE), which is up 32% this year.
SPDR EURO STOXX 50 Fund
