European economies are on the road to recovery, pulling out of a recession in 2013. As these economies pick up steam, investors can take a look at small-capitalization exchange traded funds that will capitalize on Europe’s local growth.
Many analysts predict that the European profit cycle still has room to expand, with European indices focused on small-caps still posting earnings about 60% below previous peaks, according to a WisdomTree research note. Consequently, small-cap European companies could see greater earnings growth than large-cap companies.
“At WisdomTree, we believe that small caps have the potential to offer an interesting complement to many existing regional equity allocations – a phenomenon that is especially true for Europe today,” write Jeremy Schwartz, WisdomTree Director of Research, and Christopher Gannatti, WisdomTree Associate Director of Research.
Small-cap stocks are more focused on Europe’s local recovery. In contrast, large-cap European companies have a greater stake in the global economy. Additionally, small-cap names include exposure to consumer discretionary, industrial and information technology sectors that are sensitive to changes in economic expectations like increases in consumption or capital spending. [Maybe the Best Europe ETF]
“There are certain sectors that have greater potential to respond than others,” the WisdomTree analysts said. “In our estimation, the performance of three in particular – consumer discretionary, industrials and information technology – has the potential to be very sensitive to economic cycles.”
Looking at European countries, WisdomTree points out the U.K., Sweden and Germany as examples of core European countries that have performed well.
The WisdomTree Europe SmallCap Dividend Fund (NYSEArca: DFE) is the only broad small-cap Europe ETF available. The ETF includes heavy weights to the three cyclical sectors – industrials at 25.6%, consumer discretionary at 16.2% and information technology at 15.7%. Additionally, it includes heavier tilts toward the U.K. at 24.6%, Sweden 14.3% and Germany 10.5%. DFE is up 8.0% year-to-date and has an average annualized 5-year return of 27.9%. [Small-Cap Royalty With This ETF]
Investors can also take a more targeted approach with some Europe country-specific ETFs. For instance, thhe iShares MSCI United Kingdom Small-Cap ETF (NYSEArca: EWUS) provides exposure to small-cap U.K. stocks. The fund allocats 24.0% in consumer discretionary, 21.3% in industrials and 9.7% in information technology. EWUS is up 4.1% year-to-date.
Additionally, investors can find small-cap exposure to German stocks through the iShares MSCI Germany Small-Cap ETF (NYSEArca: EWGS) and Market Vectors Germany Small-Cap ETF (NYSEArca: GERJ). GERJ has 24.1% in industrials, 16.1% in information technology and 12.1% in consumer discretionary. EWGS weights industrials at 32.4%, information technology 15.7% and consumer discretionary 10.6%. EWGS is up 6.1% year-to-date while GERJ gained 3.7%. [Seven Credible ETF Avenues to Germany]
For more information on Europe, visit our Europe category.
Max Chen contributed to this article.