The Vanguard FTSE Europe ETF (NYSEArca: VGK) is the largest dedicated Europe ETF trading in the U.S. and the popular VGK is up 1.2% over the past month, bringing its year-to-date gain to almost 17%. That underscores this year’s strength in European stocks.
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.
VGK “well-diversified portfolio includes over 1,100 stocks listed in 15 developed European countries, covering 98% of the investable market. It currently only parks 16% of its assets in its top 10 holdings. Market-cap weighting tilts the portfolio toward the largest companies in Europe, such as Nestle, BP, and HSBC, while keeping turnover low. Many of these companies have global operations, which makes their listing country less significant,” said Morningstar in a recent note.
VGK just got a little cheaper. Earlier this year, 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.
Still, political risks linger for Europe ETFs, including VGK. Some of that risk stems from the U.K., VGK’s largest geographic exposure.
“The ‘hung Parliament’ creates more uncertainty surrounding the U.K.’s exit from the EU.
It will likely delay negotiations with the EU, increase the risk of a disorderly Brexit, and bring in a period of heightened political insecurity,” reports ETF Daily News. “The Brexit negotiations were set to begin on Monday, June 19. But they might have to be postponed. And that means the U.K. may be staring at weaker growth as uncertainty increases.”
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.
Additionally, market analysts have upwardly revised their projections on Eurozone markets as a weakening euro currency, stronger global demand and steepening yield curve help support revenue growth, potentially signaling a turn in the prolonged earnings recession.
For more information on the Eurozone, visit our Europe category.