Long a laggard relative to U.S. markets, Europe could finally be ready to bounce back and investors can participate in some of that upside without a full commitment to the continent by considering the FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (NYSEArca: TLTD), a broader developed markets ETF.
On the surface, TLTD, which carries an annual expense ratio of 0.42% looks like a standard EAFE ETF due to its noticeable allocations to Japan and Australia, among other developed markets. However, TLTD does feature a legitimate “tilt” and it is toward “smaller-cap and value stocks using a multi-factor modeling approach that attempts to enhance portfolio risk/return characteristics,” according to FlexShares.
“Europe was initially slow in launching policy measures to combat the coronavirus shock. Not any longer,” said BlackRock in a recent note. “An impressive array of fiscal and monetary measures is getting into place to bridge the economy through the shock. In addition, the euro area has had relative success in curbing virus growth, positioning it well for reopening its economy.”
That’s meaningful for TLTD because the FlexShares fund allocates about a third of its weight to European equities.
Time for TLTD
The European Union’s actions to create a 750 billion euro or $826.5 billion recovery fund to help the ailing economy for the effects of the coronavirus pandemic also boosted the euro.
“After an initially slow start, the euro area’s policy response to the virus shock is picking up pace, with additional spending measures announced recently by Germany and France. Combined with additional monetary support, the size of the stimulus is broadly sufficient to match the income shortfall on a euro area level, our analysis shows,” according to BlackRock.
Bolstering the case for TLTD is defensive sector-level positioning as consumer staples, healthcare and utilities stocks combine for roughly 20% of the fund’s weight. Additionally, Japan – obviously not a European nation – is TLTD’s largest geographic weight and that’s meaningful due to that country’s dividend growth capabilities.
Getting back to Europe, the region’s COVID-19 response could support economies for the rest of this year, making TLTD a compelling bet.
“We are seeing many reasons to be optimistic about the euro area in the second half of 2020, including the ramped-up policy response and effective public health measures. The total of the euro area’s policy actions looks impressive – and they come on top of relatively large automatic stabilizers such as generous welfare benefits,” notes BlackRock.
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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.