Bullish on Europe? Play It Safe with the QLVD ETF

There’s budding enthusiasm for European equities as some high-level investors believe the continent could be one of the best-performing regions this year.

However, investors have heard this story before, only to be left disappointed. For those thinking this year will be different – and there’s some evidence suggesting it will be – the FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (NYSE: QLVD) provides a prudent avenue to European equity exposure.

QLVD holds nearly 230 stocks, and while Japan holds its largest individual country exposure, it also features ample European allocations. The fund includes Swiss, British, Danish, French, German, and Dutch stocks on its roster. Those countries combine for approximately 43% of QLVD’s geographic weight. That could be a plus over the remainder of this year.

“We think there is a good chance that Europe outperforms all major regions this year for the first time in a calendar year since 2000,” according to a Morgan Stanley research note cited by CNBC.

Benefits at the Sector Level

While global investors are mostly positive on European equities this year, some sectors are preferred more than others, including healthcare and the region’s resurgent banking names. QLVD allocates nearly 32% of its weight to financial services and healthcare stocks.

There’s also opportunities to be had with European energy producers and power providers. Owing to its status as a low volatility fund, QLVD has no energy exposure, but its utilities weight is decent at 7.58%.

Adding to the case for QLVD as an indirect Europe play is that earnings power on the continent is finally on the mend. For years, one of the primary reasons European equities were inexpensive relative to U.S. counterparts was because the former had slack earnings growth. That could change this year, particularly with cyclical sectors back in fashion.

“Europe’s price underperformance in 2020 was driven by a materially inferior earnings per share (EPS) trend. Post this larger fall, Europe has the scope to enjoy a bigger bounceback in EPS over the next 12-18 months than many of its peers, especially the US given the potential for a corporate tax hike in 2022,” according to Morgan Stanley.

QLVD is higher by 5.35% year-to-date and 1.70% over the past month. The FlexShares fund sports a dividend yield of 2%.

For more on multi-asset strategies, visit our Multi-Asset 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.