Europe exchange traded funds are outperforming U.S. equities as the Eurozone’s economic recovery continues to gain momentum. However, investors should still be aware of some potential hurdles.
The Vanguard FTSE Europe ETF (NYSEArca: VGK) is up 4.3% year-to-date while the S&P 500 index is only 2.4% higher so far this year. [Europe ETFs for Possible ECB Quantitative Easing]
“The recovery has now taken hold,” Siim Kallas, an Estonian politician, vice president of the European Commission, said in a New York Times article.
The European commission believes that the Eurozone will gain momentum this year and continue through 2015.
“Deficits have declined, investment is rebounding and, importantly, the employment situation has started improving,” Kallas said.
Nevertheless, Kallas pointed to potential threats ahead, including tensions with Russia, extended period of low inflation and the need for continued reforms.
The commission projects that the Eurozone could expand 1.6% this year and touch 2% next year, compared to a 0.1% increase last year. Across the EU, unemployment rate will continue to dip to 10.5% this year and to 10.1% next year, compared to a jobless rate of 10.8% in 2013.
Moreover, the commission warned that France and Italy could lag behind the rest of the Eurozone. Observers fear that France could slip back into stagnation while Italy’s government tries to enact reforms and loosen its debt targets. The commission estimates that the French economy will grow 1% this year and 1.5% next year while Italy’s economy will expand 0.6% this year and 1.2% next year.
The iShares MSCI France ETF (NYSEArca: EWQ) has increased 5.3% and the iShares MSCI Italy Capped ETF (NYSEArca: EWI) has surged 15.2% year-to-date.
Looking at VGK’s underlying holdings, France makes up 14.6% of the ETF’s portfolio and Italy accounts for 3.9%. [Big Upside for the France ETF]
Investors more interested in targeted exposure to Eurozone economies may consider the iShares MSCI EMU ETF (NYSEArca: EZU). EZU focuses on countries that use the common euro currency, whereas other broad Europe ETFs, like VGK, include large United Kingdom and Switzerland exposures. EZU includes a 32.4% weight toward France and 7.9% toward Italy.
iShares MSCI EMU ETF
For more information on the Eurozone, visit our Europe category.
Max Chen Contributed to this article.