For the better part of a decade, if not longer, European equities moved in fits and starts, typically lagging U.S. equivalents while providing advisors with little reason to add developed international diversification to client portfolios.
With the dollar weak and the euro strong, that scenario could be improving, providing the impetus for advisors to revisit Europe. That can be done in indirect fashion with the right model portfolio. Consider the Developed International Model Portfolio, which is part of WisdomTree’s Modern Alpha lineup of model portfolios.
“This model portfolio is designed for investors with a long-term horizon looking for exposure to a broad universe of Developed International equities primarily using factor focused ETFs,” according to WisdomTree. “The selected ETFs provide certain factor tilts that have the potential to generate excess return relative to comparable cap-weighted benchmarks over longer-term holding periods. The strategies may use both WisdomTree and non-WisdomTree ETFs.”
With the Federal Reserve taking interest rates to historic lows, the dollar is sliding, providing a runway for other currencies to rally. That’s significant when discussing the euro and European equities.
“The primary reason for such large returns is because the euro is associated with ‘risk-on’ sentiment,” notes WisdomTree Director of Asset Allocation Jeff Weniger. “You often see it rallying at the same time as the stock market, causing big performance runs that raise eyebrows when sentiment is on the upswing.”
Like other developed markets, many European markets, both in and out of the Eurozone, are home to major equity benchmarks with higher dividend yields than the S&P 500. The yield disparity between European stocks and bonds has been widening as recent global uncertainty pushed investors out of the equities market and into safe-haven fixed-income assets.
While a growth pickup would benefit emerging markets, Europe’s health infrastructure and policy response to the coronavirus pandemic has left it better placed in the global economy. The effective monetary policy response in the face of the coronavirus pandemic is propping up European equities this year.
There are reasons why WisdomTree’s Developed International Model Portfolio is a practical approach to accessing European stocks. While the region offers promise, it still faces potential headwinds, underscoring the point that the model portfolio not owning dedicated Europe ETFs is an advantage.
For more on how to implement model portfolios, visit our Model Portfolio Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.