European equity markets have lagged the U.S. for a lengthy stretch, but even amid potential Eurozone political volatility, some market observers believe Europe could be a desirable developed market destination this year.
Potential investors interested in gaining exposure to the European markets have a number of options available. For instance, the iShares MSCI EMU ETF (NYSEArca: EZU) and SPDR EURO STOXX 50 (NYSEArca: FEZ) provide access to Eurozone markets. However, the two do not hedge their currency exposure, so they may be negatively affected by a weakening euro currency.
The Eurozone macroeconomic environment has steadily improved, with a significant uptick in manufacturing and services PMIs over the end of 2016. Eurozone growth may continue to pick up speed ahead after the European Central Bank revealed increased loan demand and easing of terms and conditions on new loans to help stimulate the economy.
“Why is Europe particularly attractive right now? Quite simply, the European economic engine is starting to rev again. Eurozone PMI grew at its fastest pace in nearly six years in the first quarter. That’s particularly welcome news for the ECB which is starting to see the significant stimulus measures it has put in place to spur growth and lift inflation finally paying dividends,” reports ETF Daily News. “The overall Eurozone economy grew by roughly 0.6% in the most recent quarter, wage growth is showing signs of improvement and an increasing global trade is helping spur further growth.”
Investors who believe the euro currency will continue to weaken and are bullish on the Eurozone’s outlook can turn to currency-hedged ETF options, such as the the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ). These currency-hedged Europe ETFs may outperform non-hedged Europe funds if the euro continues to depreciate against the U.S. dollar.
The Vanguard FTSE Europe ETF (NYSEArca: VGK) is the largest dedicated Europe ETF trading in the U.S. Investors should note VGK is not a dedicated Eurozone ETF as highlighted by its hefty weights to the U.K., Switzerland and some Nordic countries.
In a post-Brexit environment, many immediately wrote-off European exposure in a knee-jerk reaction to the ongoing uncertainties. However, investors may miss out on cheap valuations in Europe-related exchange traded funds as a long-term investment opportunity.
“Undervalued growth plays are getting increasingly difficult to find, but Europe is looking interesting for longer-term investors who are willing to let the story play out. Once the political uncertainty in the region that I suspect we’ll see throughout all of 2017 begins dying down, the Eurozone’s improved economic environment should be ready to take center stage,” according to ETF Daily News.