Some market observers believe that 2017 will be the year that European stocks will end a multi-year run of lagging their U.S. counterparts. Investors looking to play that trend have plenty of exchange traded funds to pick from.
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.
The European Central Bank has been implementing a loose monetary policy that dragged yields down to record lows. Consequently, dividend-paying European stocks and related exchange traded funds (ETFs) may strengthen as more investors turn to riskier assets.
Like other developed markets, many European markets, both in and out of the Eurozone, are home to major equity benchmarks with higher dividend yields than the S&P 500. The yield disparity between European stocks and bonds has been widening as recent global uncertainty pushed investors out of the equities market and into safe-haven fixed-income assets.
VGK “is one of the cheapest and best-diversified funds in the Europe stock Morningstar Category. The portfolio is made up of nearly 1,200 stocks across the market-cap spectrum from 16 developed countries in Europe, representing 98% of the investable market,” said Morningstar in a recent note.
VGK just got a little cheaper. Last week, Vanguard unveiled another round of fee cuts and VGK was part of that group. The Europe ETF now charges 0.1% per year, or $10 on a $10,000 investment, down from 0.12% per year.
“The fund weights these holdings by market cap, which promotes low turnover and reflects the market’s collective view about the relative value of each holding. Style purists should note that because the portfolio is tilted toward large multinational firms, such as Novartis (NVS), Vodafone Group (VOD), and Nestle (NSRGY), it does not offer clean exposure to the European economy. However, most of the fund’s country and sector weightings are similar to the category average, though VGK has greater exposure to financial-services stocks and less exposure to the technology sector,” adds Morningstar.
VGK is up almost 3.7% year-to-date.
For more information on the European markets, visit our Europe category.