A New ETF Route to Europe

ETF Trends

This has been a good year for Europe ETFs. Mounting signs of economic recovery in the U.K. and Eurozone coupled with increasingly accommodative monetary policy from the European Central Bank have bolstered the fortunes of a wide range of Europe ETFs.

Two Europe ETFs – the Vanguard FTSE Europe ETF (VGK) and the iShares MSCI EMU ETF (EZU) – are found among the top-10 asset gathering ETFs for the year. Others have proven comparably adept at garnering inflows.

Earlier this year, the WisdomTree Europe SmallCap Dividend Fund (DFE) and the WisdomTree Europe Hedged Equity Fund (HEDJ) crossed the $1 billion in assets under management mark. DFE and HEDJ have since grown 73% and almost 82%, respectively. [Popular ETFs Ahead of ECB Meeting]

All that is to say this is not a bad time to roll out a new Europe ETF, such as the iShares Core MSCI Europe ETF (IEUR) . IEUR debuted last week as part of the expansion of the iShares core suite of ETFs.

Advisors and investors evaluating IEUR will undoubtedly notice the new ETF’s 0.12% expense ratio, which puts the new ETF squarely in competition with VGK. Of course, big institutions like saving money on fees as well. IEUR’s annual fee is just 10% of the average, comparable, actively managed mutual fund.

When the iShares Core MSCI Emerging Markets ETF (IEMG) debuted in late 2012, conventional wisdom said that ETF was geared towards cost-conscious retail investors. In reality, institutional investors have been big drivers IEMG’s growth to over $4.7 billion in assets. [Core ETFs Popular Among Institutions]

A similar scenario could be seen in the future with IEUR as iShares clients of all stripes look for a lower fee answer to the iShares Europe ETF (IEV) . The $3.7 billion IEV charges 0.6% per year.

Like IEV, IEUR allocates about 41% of its weight to the U.K. and Switzerland and the top-10 lineups of both ETFs are similar, though not exact matches. Overall, IEUR allocates about 49% of its weight to countries that are not Eurozone members.

However, that means the new ETF has greater Eurozone exposure than does VGK, which devotes just 47% of its weight to Eurozone nations. IEUR also offers some small-cap exposure, which could prove advantageous if European stocks continue rebounding.

“By adding small cap stocks, Investable Market Indexes (IMI) provide broader market exposure than non-IMI (standard) indexes, which include large- and mid-cap only,” according to iShares.

IEUR Country Weights

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Chart Courtesy: iShares

Tom Lydon’s clients own shares of HEDJ and IEMG.

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