The SPDR EURO STOXX 50 (NYSEArca: FEZ) is just one of many Europe exchange traded funds that are soaring this year. FEZ, which tracks the EURO STOXX 50 Index, is up 18.5% year-to-date, a better than 2-to-1 advantage over the S&P 500.
Against the backdrop of dwindling political volatility, at least over the near-term, and compelling valuations relative to the U.S., European equities and ETFs such as FEZ could offer investors even more upside as 2017 moves along.
“If we consider only the absolute levels of GDP growth or stock market performance since 2009, Europe lags the US. However, the minimal GDP growth from 2009 – 2016 does not fully reflect improved fundamentals,” according to State Street. “In fact, in the first quarter of 2017, Eurozone GDP grew at an annual pace of 1.8%, while the US posted 0.7% growth. Admittedly, these are not long-term trend numbers but still suggest a potential shift in momentum, driven by strengthening fundamentals and, potentially, by changes in political leadership.”
While the France election is wrapped up, investors still must consider other sources of European political risk, including the June Brexit poll in the U.K. as well as national elections later this year in Germany and Italy. Germany and Italy are the Eurozone’s largest and third-largest economies, respectively.
The $3.68 billion FEZ allocates over 69% of its combined weight to French and German stocks. Spain and the Netherlands combine for 20.5%.
With the bull market in U.S. stocks aging and investors increasingly feeling stocks here are richly valued, some are turning to Europe and the related exchange traded funds in search of bargains. FEZ shows a 14.2 P/E and a 1.5 P/B, whereas the S&P 500 Index is hovering around a 18.7 P/E and a 2.7 P/B.
“But from a broad, regional asset class perspective, when we look at price-to-book value (P/B) adjusted for sector comparability across regions,we see that Europe is trading 33% below the US on a P/B basis. This is one of the deepest discounts in 20 years—a period that includes two recessions and the debt crisis,” according to State Street.
European cyclical stocks are attractively against U.S. equivalents, which is a positive for FEZ. The ETF devotes over 47% of its combined weight to cyclical financial services, industrial and consumer discretionary names.
For more information on the European markets, visit our Europe category.