European equities get a well-deserve bum wrap because the region has made a habit of lagging U.S. stocks. That was the case again last year, but when all was said and done, the S&P Europe 350 Index and the Eurozone-focused MSCI EMU Index returned 24% and 22.3%, respectively.
Those are solid showings. But investors’ reluctance to allocate to European equities and related exchange-traded funds is attributable to the fact that the S&P 500 returned 31.2% last year. Why embrace Europe when domestic stocks are outperforming? That’s what many investors are asking and it’s a sensible query.
Investors are right to be leery of European ETFs simply because the region’s earnings growth has been lethargic for so long.
“The US equity market has managed to grow its EPS close to 90% since its pre-crisis peak, compared with just 17% in Asia, 12% in Japan and a paltry 4% in Europe,” Goldman Sachs’ Peter Oppenheimer said in a note. “Europe’s profit weakness partly reflects its value-dominated sector composition.”
Indeed, Europe is a value proposition and with earnings growth expected to rebound there this year, some of the following funds are worth considering.
European ETFs to Buy: SPDR Portfolio Europe ETF (SPEU)
Expense ratio: 0.09% per year, or $9 on a $10,000 investment.
The SPDR Portfolio Europe ETF (NYSEARCA:SPEU) is a hidden gem among European ETFs, particularly for cost-conscious investors. In nearly all cases, investors can expect higher fees when it comes to international ETFs, but SPEU softens that blow as it’s one of the least expensive funds in its category.
SPEU follows the STOXX Europe Total Market Index, a broad benchmark of Western European economies. Overall, nearly 20 countries are represented in the cost-effective SPEU. The United Kingdom, France and Switzerland combine for 56% of the fund’s weight. Including those markets, the bulk of SPEU’s geographic exposure trades at valuation discounts to comparable domestic benchmarks.
SPEU’s more than 1,400 holdings are well diversified among cyclical and defensive sectors. Financial and industrial stocks combine for almost a third of the fund’s roster. Lower-beta healthcare and consumer staples names combine for over a quarter.
Global X MSCI Greece ETF (GREK)
Expense ratio: 0.59%
As a single-country fund, and a volatile one at that, the Global X MSCI Greece ETF (NYSEARCA:GREK) is best used by tactical investors. That warning aside, GREK was one of the best-performing European ETFs last year as the Greek economy started bouncing back to life.
The market and economy’s resurgence has been so impressive. In 2019, Greece was able to join the parade of countries issuing negative-yielding debt, an almost unthinkable act for this country as recently as five years ago. Speaking of Greek bonds, Fitch Ratings recently upgraded the country’s credit rating to BB.
“General government debt sustainability continues to improve, underpinned by a stable political backdrop, sustained GDP growth and a continuing track record of fiscal outperformance against targets,” said the ratings agency in a recent note. “The Positive Outlook reflects improved prospects for political stability and policy implementation following the July parliamentary election and greater confidence that general government debt will fall at a steady pace.”
WisdomTree Europe Hedged Equity Fund (HEDJ)
Expense ratio: 0.58%
Many critics have written off currency-hedged ETFs as a relic of a bygone era. That assessment is only partially accurate, and mostly pertains to investors’ enthusiasm for these funds. While that enthusiasm has waned, the WisdomTree Europe Hedged Equity Fund (NYSEARCA:HEDJ) is still a $3.4 billion ETF.
More importantly, the European Central Bank (ECB) shows no signs of reducing its easy monetary policies anytime soon. And while the Federal Reserve lowered interest rates three times last year, the dollar was still mostly strong. That helped HEDJ return an impressive 27.5%, beating the un-hedged MSCI EMU Index by 420 basis points.
HEDJ is directly levered to euro weakness against the dollar because the bulk of its components are export-driven companies. Another perk: HEDJ holdings are dividend payers, many of which are steady payout growers.
ProShares MSCI Europe Dividend Growers ETF (EUDV)
Expense ratio: 0.55%
One of the primary advantages of European equities is that, in many cases, they offer higher dividend yields than their U.S. equivalents. That’s true across all sectors. While the ProShares MSCI Dividend Growers ETF (BATS:EUDV) does offer a decent yield of 2.2%, it’s more of a dividend growth play.
The fund tracks the MSCI Europe Dividend Masters Index, which requires that components have a minimum dividend increase streak of at least a decade.
“In Europe, rising earnings growth could bolster dividend growth in 2020. Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team [conviction] in their businesses,” according to ETF Trends.
EUDV holds 56 stocks, over 52% of which are U.K. and French companies. Industrial and healthcare stocks combine for 34.4% of the fund’s roster.
WisdomTree Europe Quality Dividend Growth Fund (EUDG)
Expense ratio: 0.58%
Keeping with the theme of European dividend growth there is the WisdomTree Europe Quality Dividend Growth Fund (NYSEARCA:EUDG). EUDG and the EUDV may appear to be cousins, but the reality is that they’re different products. Investors will experience different outcomes over long holding periods with these European ETFs.
EUDG follows the WisdomTree Europe Quality Dividend Growth Index, which sources dividend growth differently. It doesn’t just rely on payout increase streaks. This fund deploys growth and quality factors to identify reliable dividend increases.
Home to over 200 stocks, EUDG devotes about 58% of its weight to the industrial, consumer staples and consumer discretionary sectors.
iShares MSCI Europe Small-Cap ETF (IEUS)
Expense ratio: 0.40%
For investors looking for a broad basket of European small-cap stocks — an asset class that could rally as the continent’s economies perk up — the iShares MSCI Europe Small-Cap ETF (NASDAQ:IEUS) is an ETF that make sense. Some investors believe European small-caps are due to take flight this year.
“Unwinding 2019’s flight to safety will unfold in stair steps throughout 2020, boosting cyclical equities, European and Japanese small caps,” said PineBridge Investments in an interview with Bloomberg.
IEUS, which tracks the MSCI Europe Small Cap Index, has some benefits relative to competing domestic small-cap funds. Notably the iShares ETF, which holds almost 1,000 stocks, has lower valuations and a similar if not superior three-year standard deviation than major U.S. small-cap benchmarks.
JPMorgan BetaBuilders Europe ETF (BBEU)
Expense ratio: 0.09%
Another cost-effective fund for broad-based European equity exposure is the JPMorgan BetaBuilders Europe ETF (BATS:BBEU). Low fees certainly get investors in the door, as highlighted by BBEU’s $4 billion in assets in under management. That’s an impressive sum for an ETF that’s not quite two years old. And it’s enough to make BBEU one of JPMorgan’s (NYSE:JPM) largest ETFs.
BBEU follows the Morningstar Developed Europe Target Market Exposure Index, “a free-float adjusted market-cap weighted index consisting of stocks traded on the primary exchanges in developed countries across Europe,” according to the issuer.
BBEU holds nearly 550 stocks and comes with a sturdy dividend yield of 3.3%. That’s significantly more attractive than what investors will find on comparable domestic equity funds. Since its lows last August, BBEU is higher by more than 15%.
As of this writing, Todd Shriber did not own any of the aforementioned securities.