Thanks to the European Central Bank’s accommodative monetary policy and the subsequently stumbling euro, European equity exchange traded funds have received ample adulation and attention this year.
Investors put $71 billion into non-U.S. developed equities in the first three months of the year, making it the strongest first quarter on record. Currency hedged ETFs saw inflows of $26.8 billion in Q1 as investors looked to hedge their international equity exposure due to a stronger dollar,” according to BlackRock, parent company of iShares, the world’s largest ETF issuer. [ETFs see big March Inflows]
Through the first three months of the year, five of the top-10 asset-gathering ETFs are either Europe-specific or Europe-heavy funds. Investors looking for tactical, single-country exposure would do well to remember Spain ETFs.
On a year-to-date basis, the iShares MSCI Spain Capped ETF (NYSEArca: EWP), the largest dedicated Spain ETF, is up “just” 3.1% compared to an almost 9% gain for the iShares MSCI EMU ETF (NYSEArca: EZU). However, most of EWP’s lethargy was seen in the first half of January. Over the past three months, the ETF is up more than 10% and more upside could be on the way. [PIIGS ETFs Breakout]
“Spain is a particularly cheap country. And, while Spain is certainly not without its problems (Catalonia is still threatening to secede…), its economy is finally on the mend. Spain’s economy is expected to grow at a 2.5% clip this quarter, and the unemployment rate has been steadily ticking down for the past 12 months. The country is still a mess, but it’s quietly getting its house in order,” according to Charles Sizemore.
As Sizemore notes Spain’s CAPE, or cyclically-adjusted price-to-earnings ratio, is just 11.6. That’s below the CAPE on British and French stocks and less than half the CAPE on U.S. stocks.
Investors can also consider the factor based SPDR MSCI Spain Quality Mix ETF (NYSEArca: QESP) as an alternative to the cap-weighted EWP. The quality factor “captures excess returns to stocks that are characterized by low debt, stable earnings growth and other ‘quality’ metrics,” according to MSCI.
QESP is also heavily exposed to the financial services sector with a weight of 33.5% to that group. The factor-based Spain ETF also offers some leverage to the recovering Spanish consumer with over 10% of its weight going to consumer sectors. [Quality Approach to Country ETFs]
“It’s the valuation that I think is grossly undervalued here. With eurozone bond yields at record lows, European stocks should be trading at premiums to their long-term averages. But, in Spain’s case, the CAPE of 11.6 is significantly below its long-term average of 15.6. Rather than add 0.1% to annual returns, I believe 0.5%-1.0% seems more reasonable. That would put us closer to 8% annual returns,” adds Sizemore.
iShares MSCI Spain Capped ETF
ETF Trends editorial team contributed to this post.