Improving Outlook in Europe Makes This ETF Worth Examining

Throughout financial history, there’s a plethora of instances in which a country’s equity markets performed well while its economy stagnated and vice-versa. On the other hand, it’s often helpful to a country’s financial markets to have a strong-performing economy. After years of malaise, that scenario appears to be playing out in much of Europe, giving rise to exchange traded funds such as the WisdomTree Europe Quality Dividend Growth Fund (EUDG).

EUDG is higher by 7.51% over the past month – a period coinciding with data confirming that the mild recession that recently afflicted much of Europe likely halted in the first quarter.

Eurozone economies posted modest economic contractions in the third and fourth quarters of 2023 before posting first-quarter GDP growth of 0.3%. Looking out toward the remainder of 2024, some economists expect that the Eurozone’s GDP growth can keep pace with or exceed that of the U.S. While EUDG, which turned 10 years old earlier this month, isn’t a dedicated Eurozone ETF, the majority of its geographic weight tilts to those economies.

EUDG Evaluation: Things Are Getting Interesting

Multiple potential tailwinds are forming for European equities, including EUDG holdings. Importantly, some of that positivity is emanating from large economies, including Germany. German stocks account for almost 9% of the EUDG roster.

“Europe’s momentum appears to be both improving and broadening since the end of the first quarter. In April, the Eurozone Composite Purchasing Managers’ Index (PMI) rose above the 50 level that separates expansion from contraction for the second month in a row,” according to Charles Schwab research. “The index initially fell below 50 in July 2023. Germany is the largest economy and has been the economic laggard in the region. However, in April, the Composite PMI for Germany moved into expansion for the first time in 10 months.”

As noted above, EUDG isn’t a dedicated eurozone ETF. British and Swiss stocks combine for 42.15% of the ETF’s weight. The large exposure (21.15%) to U.K. equities is something for investors to consider because as recently noted by Schroders, that market is sporting several contrarian indicators that could indicate a buying opportunity is afoot.

Contrarian Indicators

Those signs include deeply discounted valuations, a sluggish IPO market, more U.K.-based firms listing shares in New York, and low levels of pension ownership.

“Nobody has a crystal ball regarding exact timing, but it’s hard to see that domestic pension funds can significantly further reduce their exposure to U.K. equities,” noted the bank. “And what’s to stop a new government from mandating a certain minimum level of U.K. equity exposure within pension portfolios, following on from the current administration’s belated and rather half-hearted announcement of a British ISA?”

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