Heightened geopolitical concerns and a raft of slack economic data have been a drag on many Europe exchange traded funds this quarter.
Germany, the Eurozone’s largest economy, said earlier this week business confidence there dipped. France, the Eurozone’s second-largest economy, is showing signs of stagnation while Italy is, officially, in another recession.
Those catalysts and others have pressured Europe ETFs, a fact highlighted by third-quarter outflows of $1.1 billion for the Vanguard FTSE Europe ETF (NYSEArca: VGK), which have accompanied by a decline of 3.8%. [Stagnate Growth Pressures Europe ETFs]
Some Europe ETFs have been better and/or less bad. The Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU) is off just 0.4% this quarter and given the recent weakness in some of the region’s currencies, DBEU could prove to be a right place, right time ETF.
DBEU is often compared to hedged euro ETFs, but the ETF allocates almost 27.6% of its weight to U.K. stocks, giving the fund significant leverage to the recently tumbling Brisith pound. Since the start of the current quarter, the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) is off 3.4% and if sterling does not close higher against the greenback this week, that will extend the losing streak for GBP/USD to eight weeks. [Hedged Sterling ETFs Finally Acting Right]
The CurrencyShares Euro Currency Trust (NYSEArca: FXE) is off almost 2% in the past month, a situation that has worsened in recent days after European Central Bank President Mario Draghi gave his most overt hints to date that the central bank could employ quantitative easing measures to prop up flailing Eurozone economies.
Draghi has not been shy about noting that ECB policy is diverging from that of the Federal Reserve, but Draghi previously disappointed markets by not implementing QE, opting for negative deposit rates instead.
Still, DBEU should be a winner under a weak euro scenario with France and Germany combining for 27.8% of the ETF’s weight. The Netherlands, Spain and Italy, all Eurozone nations, combine for over 16% of DBEU’s weight. [Pre-ECB, Investors Piled Into These Europe ETFs]
A bet against the euro could prove prescient at a time when the U.S. dollar appears poised to rally against the common currency. As Luke Oliver, Head of Capital Markets and Passive Investments at Deutsche Asset and Wealth Management recently pointed out on a webcast with ETF Trends, since 1968, the average U.S. dollar peak and trough appears approximately every eight years. The current cycle is in its 12th year, with the U.S. Dollar Index near all-time lows. [Thwart Euro Risk With This ETF]
European stocks are also discounted relative to their U.S. counterparts. At the end of July the EURO STOXX 50 Index traded at 14.2 times projected earnings compared to 16.7 times on the S&P 500. That could create opportunities in European equities later this year.
Additionally, DBEU is positioned to benefit from European dividend growth, which is showing incremental signs of improvement. “European companies paid out $153.4 billion in the second quarter, up 18.2 percent year-on-year and the best performance on a constant currency basis in at least five years,” Reuters reported earlier this month, citing Henderson Global Investors.
French and Spanish stocks are among the region’s highest yielders and those countries combine for nearly 20% of DBEU’s weight. Excluding the U.K., European dividends have risen just 8% since 2009, indicating the continent has the potential to deliver robust payout growth going forward.
That says DBEU could exposure investors to significant dividend growth in the future with the added comfort of heavy U.K. exposure, an important feature considering that the U.K. is the second-largest developed markets dividend payer in the world after the U.S. [European Dividends are Perking Up]
Deutsche X-Trackers MSCI Europe Hedged Equity ETF
