Europe exchange traded funds have risen from the ashes of the region’s sovereign debt crisis to, in some cases, rank among the better ex-U.S. developed market performers in 2013.
For investors that think they have missed out on the run in Europe ETFs or that said has led to stretched valuations on European stocks, there are reasons to believe these ETFs can run some more in 2014 and that their holdings are not yet richly valued.
The Vanguard FTSE Europe ETF (NYSEArca: VGK), the largest Europe ETF by assets, “represents an excellent way to play the euro zone. It is based on the performance of the FTSE Developed Europe Index and captures the top 90% of the region’s market capitalization. The fund, which holds about 500 stocks, is up nearly 23% this year, besting the FTSE 100 Index. Yet stocks in the fund are trading at about 15 times forward earnings,” reports Dimitra Defotis for Barron’s.
At 15 times forward earnings, VGK’s holdings are, on that basis, trading at a discount to U.S. equities. Additionally, VGK itself is cheap with annual fees of just 0.12%, making it cheaper than 93% of rival Europe ETFs, according to Vanguard.
VGK has been the most prolific asset-gatherer among Europe ETFs this year having hauled in $6.25 billion, making it the fourth-best ETF of any type by that metric. However, VGK also serves as a reminder that there is no such thing as a “perfect ETF.”
With Eurozone P/E ratios and equity prices expected to continue recovering next year, VGK’s heavy tilt to non-Eurozone nations could be a sign more risk-tolerant investors should consider other diversified Europe ETFs. [Europe P/E Ratios can Keep Recovering]
Nearly 52% of VGK’s combined weight is allocated to the U.K., Switzerland and Sweden, a steady trio of markets, but none of which are Eurozone nations.
Last week, Stephen Murray, portfolio manager at New Hampshire-based Harvest Capital Management, said in an interview with ETF Trends that his firm wanted to focus on Eurozone equities, so it opted to go with the SPDR EURO STOXX 50 (NYSEArca: FEZ). [Settling the Big Europe ETF Debate]
FEZ, which is heavily allocated to French and German stocks, has sharply outpaced VGK over the past 90 days.
In the event the euro, which has been strong against the dollar this year, declines, investors may also want to consider currency-hedged ETFs such as the db X-Trackers MSCI Europe Hedged Equity Fund (NYSEArca: DBEU) and the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ).
DBEU is more of the hedged answer to VGK as the former holds stocks of 16 developed Europe nations. That means DBEU also offers a hedge on the British pound and Swiss franc in addition to the euro.
HEDJ, which has slightly trailed VGK this year, has a 0.67% weight to the U.K., but the rest of the fund focuses on the Eurozone with Germany, France and the Netherlands combining for almost two-thirds of HEDJ’s country weight.
HEDJ Country Weights
