For many investors — especially those in retirement — adding a dose of European stocks could be a great portfolio play right now.
To start with, adding European stocks makes going global and eliminating hometown bias easy and painless. Developed Europe is home to some of the largest multinational firms on the planet. Drugmaker GlaxoSmithKline (GSK) and industrial giant Siemens (SIEGY) are two of the biggest firms in their respective fields and should be well-known by investors. Neither of them is domiciled in the United States.
Developed Europe is littered with many such well-known names. By playing European stocks, investors can gain the diversification benefit of going global without straying into unfamiliar territory.
But retirement investors may want to add some European stocks for another reason — namely, income. The broad developed market S&P Europe 350 index yields about 2.9%. That’s almost a full percentage point higher than the bread ‘n’ butter S&P 500. Meanwhile, the European benchmark is trading 3 percentage points cheaper on a price-to-earnings basis versus the American benchmark.
Easy diversification, cheap prices and high income. What’s not to like? With that in mind, retirement investors may want to give European stocks a look. Here’s the best ETFs to do just that.
Best ETFs for European Stocks: Vanguard FTSE Europe ETF (VGK)
Expense Ratio: 0.12%
If you’re looking for broad, index-hugging exposure to European stocks, then the Vanguard FTSE Europe ETF (VGK) is for you. At about $21 billion in assets, VGK is one of the largest ETFs tracking European stocks, and it’s easy to see why.
VGK tracks the FTSE Developed Europe Index, which covers large- and mid-cap companies in developed Europe. That provides exposure to European stalwarts like Germany, France and the United Kingdom, as well as some smaller nations like Luxembourg and Finland. All in all, VGK’s list of 514 different stocks reads like a who’s who of the world’s largest and most successful multinationals. Top holdings include diversified food manufacturer Nestle (NSRGY), integrated energy giant Royal Dutch Shell (RDS.A, RDS.B) and pharmaceutical firm Sanofi (SNY).
That super-broad exposure makes it one of the best ways to add a wide swath of European stocks to a portfolio.
But there’s another reason to love VGK — its low cost of ownership. As a Vanguard-sponsored ETF, VGK is very inexpensive. The ETF costs only 0.12%, or $12 annually per $10,000 invested. Expenses do matter, and over long stretches of time, those costs can eat away at returns. VGK’s 0.12% will help investors keep more of their money.
Add in its 3.4% dividend yield, and you can see why VGK is one of the best ETFs for European stocks.
Best ETFs for European Stocks: First Trust STOXX European Select Dividend ETF (FDD)
Expense Ratio: 0.6%
For retirement investors looking to squeeze a bit more income out of their European stocks allocation, a dividend-focused ETF may be a better bet. One of the best ETFs in that category is the First Trust STOXX European Select Dividend ETF (FDD). FDD makes a concentrated bet on some of Europe’s highest-yielding dividend payers.
First, the ETF combs through the broad STOXX Europe 600 index. FDD then applies various screens — such as dividend-per-share growth rates and a dividend-to-earnings-per-share ratio — to whittle that portfolio down to just 30 stocks. The fund will then rank them according to dividend yield, with the highest-paying equities getting top billing.
The smart-beta screens not only create a portfolio of high-dividend payers, but strong ones as well. And this ETF also kicks out some serious income. FDD has a yield of 4.55% — more than double the S&P 500’s dividend rate. Much of that dividend yield comes from its high exposure to financial firms and stocks domiciled in the U.K.
Expenses for FDD aren’t as cheap as the previously mentioned Vanguard ETF, but they’re still much cheaper than similarly styled mutual funds.
Best ETFs for European Stocks: WisdomTree Europe SmallCap Dividend ETF (DFE)
Expense Ratio: 0.58%
Small-cap stock funds have often been the best ETFs in which to find growth over the longer term, and retirement investors still need a hefty dose of growth to overcome longevity risks associated with their portfolios. But some caution is warranted, especially when looking at international small-caps.
That’s where the WisdomTree Europe SmallCap Dividend ETF (DFE) comes in.
DFE focuses its attention on small-cap European stocks that have a history of paying dividends. The fund uses various screens to center on the “best” small-cap dividend payers in Europe. Currently, DFE holds nearly 360 small-cap stocks, including Cofinimmo, Neopost (NPACY) and Kemira Oyj (KMRAF).
The ETF is then weighted based on the amount of annual cash dividends paid. This means that small cap companies that hand out more in dividends get more exposure than those that are tightfisted. This creates a portfolio with a yield of 2.7%.
That yield provides a nice cushion to protect against the volatile nature of small caps. Basically, DFE’s dividends act as a safety net.
Meanwhile, the focus on small caps provides plenty of growth. That means the DFE could be one of the the best ETFs to buy when it comes to adding European stocks to your portfolio.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.