How Investors Can Tap Europe for S&P 500-Beating Returns

Europe stocks and the related ETFs haven’t posted alarmingly bad returns in recent years. However, the upside generated by those assets has significantly trailed that offered by the S&P 500.

For the three years ending May 2, the MSCI EMU Index returned 10.6% while the S&P 500 gained 26.5%. Making that gap all the more attractive in favor of domestic stocks is the fact that over that period, the MSCI EMU Index sported annualized volatility of 20.8%, or 340 basis points more than what was found on the S&P 500.

In other words, the juice hasn’t been worth the squeeze with European equities. Partly because of a lengthy run of the strong dollar relative to other major global currencies. That also means currency-hedged ETFs could be viable alternatives for investors seeking Europe exposure. Just look at the WisdomTree Europe Hedged Equity Fund (HEDJ), which surged 36.5% over the past three years while being less volatile than both the MSCI EMU Index and the S&P 500.

How HEDJ Quietly Beat the S&P 500

One of the biggest knocks on European markets and the related U.S.-listed ETFs is a lack of technology sector exposure. For example, the $1.92 billion HEDG allocates 9.34% of its weight to tech stocks, or roughly a third of the S&P 500’s exposure to the same sector.

However, Europe’s artificial intelligence (AI) investment story is arguably underappreciated and HEDJ has exposure.

“Looking to Europe, one big group of companies is the automakers. These firms are very capable and longstanding, but at the core are viewed as car companies, whereas Tesla is able at times to be perceived as more of an AI or software company,” noted Christopher Gannatti, head of global research at WisdomTree. “Another big company is ASML. Nvidia’s most advanced chips are being fabricated by Taiwan Semiconductor Manufacturing Co. (TSMC) on machines developed and maintained by ASML.”

European Stocks Deeply Discounted

Europe also deserves credit for being home to some of the most iconic luxury brands in the world. That status could imply the continent’s consumer cyclical. Though not as tech-centric as the U.S., it has investing merit in its own right. HEDJ allocates almost a quarter of its weight to consumer discretionary stocks. Additionally, many of them fit the bill as quality wide moat names.

Additionally, European stocks, as measured by HEDJ, remain deeply discounted relative to the S&P 500, but as the ETF’s performance confirms, its holdings are not value traps.

“When we look at the performance of European exporters, there are periods when they have outperformed the U.S. And they have certainly not lagged as much as many might think. With that said, on a forward price-to-earnings ratio (P/E) basis, the S&P 500 Index is above 20x, whereas HEDJ is at approximately a 50% discount and closer to 10x,” concluded Gannatti.

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