With European Equities Starting to Matter Again, Consider This ETF

European equities are showing noticeable signs of life, but some investors remain skittish of across the pond offerings. After years of disappointing returns, that outlook is understandable, but investors can participate in some of the upside without a full European commitment with the FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (NYSEArca: TLTD).

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.

Data confirm European stocks are pleasant surprises this year.

“European stocks have been holding their own against Wall Street, which has traditionally been a stronger performer,” reports Barbara Kollmeyer for Barron’s. “In the quarter ended June 30, the Stoxx Europe 600 index returned around 13%, versus nearly 20% for the S&P 500. But for the month so far, the indexes are neck and neck with a gain of just over 1.7% each.”

European Allure

The effective monetary policy response in the face of the coronavirus pandemic is propping up European equities this year.

“Credit Suisse on Tuesday added further to its weighting of continental European stocks, bringing that position to a small overweight, but it downgraded U.S. equities, citing ‘additional concerns’ about the region,” according to Barron’s.

There are reasons why TLTD is a practical approach to accessing European stocks. While the region offers promise, it still faces potential headwinds, underscoring the point that TLTD not being a dedicated Europe ETF is an advantage.

“Yet Credit Suisse stopped short of overweighting the region as a whole, citing such factors as economic and political instability in Italy and weak relative earnings revisions. Also, the euro is threatening to strengthen to $1.20 to $1.25. Breaking down the region, they are overweight Germany, Sweden, and now France, with Spain lifted to benchmark weight,” reports Barron’s.

TLTD could provide better risk-adjusted returns than the broader large-cap benchmark. Specifically, its enhanced indexing process would allow the ETF to exclude expensive, low-quality companies with poor momentum.

Factor-based strategies like smart beta ETFs can be used to solve different portfolio needs. For instance, single factors help target exposure to enhance returns or address specific client needs, whereas a multi-factor approach may provide a diversified core equity allocation that leverages the benefits of multiple factors and limit cycle risks associated with individual factors.

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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.