Once considered a toxic destination for investors, Eurozone ETFs have come roaring back to life over the past few months due to improved economic data, falling bond yields and attractive valuations. Over the past 90 days, investors have been treated to a 7% pop from the Vanguard FTSE Europe ETF (VGK) , an ETF that comes with a solid 5.2% trailing 12-month yield.
The fact that the European Union office has statistical reported a growth trend after 18 months of recession is good news for investors. The EU recently showed GDP growth of 0.3%, a sign the region is breaking free from the clutches of the longest recession in EU history. [Fundamentals Looking up for Europe ETFs]
Although Europe ETFs like VGK and the iShares Europe ETF (IEV) , which is up 6.7% in the past three months have recently been in rally mode, more upside could be on the way. In the current quarter, the MSCI Europe Index is up 7.5% compared to a 2.7% gain for the MSCI USA Index, according to Morgan Stanley Wealth Management.
“In our view, the renewed interest in Europe likely reflects two factors. First, valuations and total returns are at the lower end of their long-term ranges, particularly versus those of the US. Second, the news suggests Europe has stabilized,” wrote Morgan Stanley European equity analyst Krupta Patel.
Investors are not just buying into the Europe recovery theme, they are buying Europe ETFs. While August was a dismal month for ETF outflows, particularly from U.S. equity funds, funds with a heavy dose of Europe fared much better. VGK hauled in $1.6 billion last month while the iShares MSCI EMU ETF (EZU) brought in $974 million. [Four ETFs for the Eurozone Recovery]
VGK follows stocks from Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Investors should shop for the Europe ETFs with exposure to the most attractive sectors, some of which may not be attractive here in the U.S.
“We find the most attractive European sectors versus their US counterparts are utilities, insurance, banks, energy and autos. Food and beverages, consumer services, media, capital goods and retailing are among the most expensive,” wrote Patel.
The $4.3 billion EZU’s largest sector weight is 21.6% to financial services. Energy and utilities combine for nearly 13% of the fund’s weight. The $1.8 billion IEV has an almost 21% allocation to financials with energy and utilities combining for nearly 14%. Europe’s three largest oil companies – Royal Dutch Shell (RDS-A), BP (BP) and Total (TOT) – are all top-10 holdings in VGK.
Vanguard FTSE Europe ETF
ETF Trends editorial team contributed to this post.
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.