The Euro zone is showing speedy recovery in the second quarter despite escalating tension between the European Union and Russia over the latter’s annexation of Ukraine's Crimea peninsula (read: Russia ETFs in Focus on Credit Downgrade, Rate Hike).
Business activity in April picked up at its fastest pace in almost three years and factory activity also strengthened. This is primarily thanks to reduced debt burden, improving domestic demand, growing exports, stronger currency, falling unemployment and abating deflation fears.
Solid Growth Everywhere
This is especially true given that Markit’s Composite Purchasing Managers Index for the Euro zone (18-nation bloc) jumped to 54.0 in April from 53.1 in March. Eurozone Manufacturing Purchasing Managers Index climbed to a three-month high of 53.4 in April from 53.0 while the index for the Euro zone service industry rose to a 34-month high of 53.1 from 52.2.
The data suggests broad-based recovery with Germany, Europe’s largest economy, leading the way. Growth in both manufacturing and service sectors for Spain and Ireland reached the highest levels in seven and eight years, respectively, while Italy hit a three-year high. However, France, Europe's second largest economy, is the only Euro zone nation that bucked this trend with a slight drop in new business activity.
Given the gradual recovery in the Euro zone, the European Commission (EU) sees steady growth of 1.2% for this year but lowered the growth outlook for 2015 to 1.7% from 1.8% (read: Euro Zone Recovery Puts Ireland ETF in Focus).
Recent surveys also showed signs of an improving job market in the region with modest hiring.
Though near a record high, unemployment across the Euro zone fell slightly to 11.8% in March from 12% in the year-ago month but remained stable for the past four months. Austria and Germany have lower unemployment rates of around 5% while Spain has the highest rate of 25.3%.
The EU now projects unemployment to drop to 11.8% this year and 11.4% in the next, compared with the previous forecast of 12% and 11.7%, respectively.
Easing Deflation Concerns
While annual inflation rose to 0.7% in April from 0.5% in March, it is still well below the market expectation of 0.8% and ECB’s 2% annual target. However, this eases the fear of deflation in the Euro zone. The EU expects inflation to drop from 1.3% last year to 0.8% this year before rising to 1.2% next year (read: Ride Europe Higher with This Top Ranked ETF).
Eurozone ETFs to Buy
Given the bullish fundamentals of these economies, we recommend investors to buy Euro zone ETFs at least for the short term. For interested investors, we have found a number of ETFs in the broad European space that have a Zacks ETF Rank of 2 or ‘Buy’ rating and are thus expected to outperform in the months to come (read: all the Top Ranked ETFs).
Among those, the following three funds with the largest exposure to the Euro zone economies could be good choices to play in summer. This trio has enjoyed a strong momentum and generated decent returns in the year-to-date period.
iShares MSCI EMU Index Fund (EZU)
This product provides exposure to the EMU member countries (those European Union members that use the Euro as its currency) by tracking the MSCI EMU index. EZU is one of the most popular ETFs in the broader European space with AUM of nearly $10.9 billion and average daily volume of more than 3.7 million shares. It charges investors 0.48% in annual fees.
The fund holds about 244 securities in its basket, which is pretty spread across each security, as no single firm makes up for more than 3.58% of the assets. The ETF is a large cap centric fund as about 88% of the portfolio is concentrated on this market cap level. The product has a definite tilt towards financials at 23.13%, followed by industrials (13.76%) and consumer discretionary (12.93%).
From a country look, France and Germany takes the largest share in the basket with 32.54% and 29.04% share, respectively, while Spain, the Netherlands and Italy round off the top five. The fund has added nearly 3.6% so far this year (read: Is This a Better Europe ETF?).
SPDR EURO STOXX 50 ETF (FEZ)
This fund follows EURO STOXX 50 Index, which measures the performance of some of the largest companies across the components of the 20 EURO STOXX Supersector Indexes. The fund appears rich with AUM of $5.5 billion, and average daily volume of nearly 1.8 million shares. Expense ratio came in at 0.29%.
Holding 56 securities in its basket, the product puts about 39% of its assets in the top 10 holdings. The ETF is skewed toward financials, as it takes roughly one-fourth of the total assets, while the other sectors receive modest exposure.
In terms of country allocations, France and Germany are leading with 36.38% and 31.95% share, respectively, followed by Spain (12.62%), Italy (8.49%), the Netherlands (6.67%), Belgium (3.01%) and Ireland (0.79%). The fund has returned over 3% in the year-to-date time frame.
SPDR STOXX Europe 50 ETF (FEU)
This ETF is quite similar to FEZ having amassed $236.7 million in its asset base and trades in volume of less than 81,000 shares per day. It charges 29 bps in annual fees and holds 58 stocks in its basket. While the fund tracks the same index, it is slightly different from FEZ in terms of sector and country holdings.
Financials and health care take the top two spots in terms of sector with more than 20% of assets each while consumer staples and energy round off the top four with double-digit exposure. Country weights for the top three are United Kingdom (37.41%), Switzerland (21.70%) and Germany (15.12%). The product is up 3.4% so far this year (read: Time to Bet on the British ETF?).
Given the encouraging trends, Euro zone might be due for a strong bounce back in the short term and a broad play on the region may be a good idea. Further, this bloc seems a compelling investment this summer with the Ukraine crisis not taking an ugly toll on it.
This will be especially true if investors take a closer look at a few of the top ranked ETFs in the space for excellent exposure and further outperformance in the coming months.
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