Europe exchange traded funds have built on the momentum established last year and have not only offered solid returns in 2014, but have impressed in terms of gathering assets as well.
The Vanguard FTSE Europe ETF (NYSEArca: VGK) is up just over 3% while the iShares Europe ETF (NYSEArca: IEV) and the iShares MSCI EMU ETF (NYSEArca: EZU) are both up more than 5%. VGK and EZU have each hauled in more than $2.1 billion in new assets this year, ranking among the top-five ETFs in term of 2014 inflows. [Following ETF Money]
While those ETFs have delivered for investors and proven to be prodigious gathers of new assets, investors may want to consider Europe ETFs beyond the traditional.
“Perhaps a non-market capitalization weighted ‘smart beta’ approach to Europe is better suited for this European investment opportunity. In the case of VGK and IEV, investors are gaining exposure to the largest companies in Europe and simultaneously gaining exposure to the countries with the largest market capitalizations. So, with 75% of VGK allocated to only 4 countries, an investor must ask the question: Are the biggest companies and biggest countries the most attractive segment of the Europe?,” notes Accuvest Global Advisors.
Investors looking for Europe ETFs beyond the traditional have options, including the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) and the First Trust Europe AlphaDEX Fund (NYSEArca: FEP). Both are classified as “smart beta” or “enhanced index” funds, but each goes about its business in different ways. [WisdomTree Examines Smart Beta]
FEP is a smart beta fund as the ETF’s 202 holdings are selected based “on growth factors including 3-, 6- and 12-month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.
Country considerations are critical with diversified Europe ETFs. FEP and HEDJ are no exceptions. Part of the reason for the success of ETFs such as VGK is that as European equities started to rebound, investors sought out more conservative destinations such as the U.K. and Switzerland, neither of which is a member of the Eurozone, and Germany, the Eurozone’s largest economy. [Switzerland ETF Soars]
While FEP features no Switzerland exposure, the ETF’s largest country weight is 22.7% to the U.K. Sweden, Germany, Norway and Denmark combine for another 23% of FEP. Even that, the ETF’s valuation is surprisingly tame at 10.7 times earnings and a price-to-book ratio of 1.44. FEP is up nearly 32% in the past year.
“Now that the system in Europe has stabilized and a regional bounce back has occurred, we expect to see country level factors and stock specific risks lead returns higher and drive correlations lower from here. Accordingly, a deeper dive, below the regional level, is necessary to take advantage of a wider range of country returns in the region,” according to Accuvest.
On the other hand, HEDJ is exclusively focused on Eurozone nations. That results in a combined 49.1% weight to France and Germany, but the ETF’s currency hedged methodology has the potential to be potent for investors should the European Central Bank engage in quantitative easing. [Draghi Could Boost These ETFs]