Investors considering Europe ETFs dealt with some political volatility earlier this year amid controversial national elections in the Netherlands and France.
However, some market observers see Eurozone political volatility declining even as Germany is just days away from its own national election.
Meanwhile, macroeconomic data has performed well and could continue to support a sustained economic expansion as PMIs and economic sentiment indicators held up well in the face of a stronger euro currency – the EUR has appreciated 13% against the USD year-to-date. Some, though, are growing concerned a a strengthening euro is eating into Eurozone’s company earnings.
ETF investors who are still interested in the Europe story have a number of options available, such as the iShares Core MSCI Europe ETF (NYSEArca: IEUR), which is seen as a cheaper “core” alternative to older iShares Europe ETF (NYSEArca: IEV), along with the iShares MSCI EMU ETF (BATS: EZU), which is comprised of of euro member states.
“Eurozone politics have entered a period of calm after sparking market turbulence with a series of high-risk events since mid-2016,” according to BlackRock research. “Long-term challenges including slow growth, integration of immigrants and decreased competitiveness remain. Yet we see a steadier political environment supporting sustained, above-trend economic growth and some reform, and helping make the case for investing in the region’s equities.”
The iShares MSCI Eurozone ETF is up more than 26% year-to-date and allocates more than 60% of its combined weight to France and Germany. In Germany, the Eurozone’s largest economy, Chancellor Angela Merkel is widely expected to win another term in the Sept. 24th election. Political risk is also dwindling in Italy, a country that is historically politically volatile. Italy, the Eurozone’s third-largest economy, is 7.4% of EZU’s roster.
Related: Europe ETF Investors Refocus on Steady Growth
Still, some political risks remain to the European investment thesis.
“Economic growth dampens the urgency to reform, and differing views on which reforms are needed are too large to overcome,” according to BlackRock. “Italian elections in the spring are likely to cause political and financial turbulence along the way, and eventually produce a hung parliament. We see this limiting the scope for the reforms and fiscal adjustment that Italy needs to keep its large debt sustainable.”
Investors who believe the euro currency could weaken after its recent rally 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 depreciates against the U.S. dollar.
For more information on European markets, visit our Europe category.