State Street, which already has a comprehensive list of more than ten dozen products, has been continuously looking to gain market share in the ETF industry.
The issuer has launched as many as eight new ETFs this year, including the recently launched trio – SPDR MSCI EAFE Quality Mix ETF, SPDR MSCI Emerging Markets Quality Mix ETF and SPDR MSCI World Quality Mix ETF.
Along with these releases, on June 5, the issuer also launched another product –
SPDR STOXX Small Cap ETF. Trading under the ticker SMEZ, the ETF gives exposure to the European equities space (read: Three Quality ETF Launches from State Street).
SMEZ in Focus
The fund seeks to provide exposure to small companies across the Euro zone by tracking the performance of the EURO STOXX Small Index.
This strategy results in the fund holding 96 stocks in its basket, which are quite well diversified across the portfolio. The top 10 holdings form roughly 17.1% of total assets, with just 2.1% allocated to the top fund holding - Deutsche Wohnen AG. Peugeot SA, Eiffage SA and Bankinter SA are some of the other top holdings of the fund.
However, there seems to be some sector concentration in the fund as the top three sectors – Financials, Consumer Discretionary and Industrials – alone occupy two-thirds of total fund assets. Energy and Utility have the lowest allocations in the fund.
While Germany and France have roughly 25% allocation each in the fund, Italy occupies 11.4% and Spain has 9.25%. The fund charges 45 basis points as fees making it a relatively middle of the road product in terms of costs (read: Hot Euro Zone ETFs for Summer).
How Does It Fit in the Portfolio?
The newly launched ETF can be a good choice for investors looking to gain exposure to the small cap companies within the Euro zone. This is especially true given that small cap companies are closely tied to the European economy and generate the majority of their revenues from the domestic market. Moreover, they pick up faster than their larger counterparts in a growing economy.
The European central bank has recently reduced interest rates and has announced several other banking measures to support Euro zone’s economic recovery (read: Negative Interest Rates Put These European ETFs in Focus).
These measures are expected to spur bank lending and battle low inflation within the Euro zone. Moreover, some economists expect Euro zone activity to gradually improve going forward after growing at a modest pace of 0.2% over the previous quarter.
“As Europe’s economy recovers from a double-dip recession that began in 2008, investors are growing more optimistic about the growth potential of European equities,” said James Ross, executive vice president and global head of SPDR Exchange Traded Funds at State Street Global Advisors.
The broad European equities fund is crowded with a number of ETFs such as Vanguard FTSE Europe ETF (VGK), SPDR Euro Stoxx 50 ETF (FEZ), iShares MSCI EMU ETF (EZU) and iShares Europe ETF (IEV) (see all the European Equity ETFs here).
The newly launched fund is likely to face competition particularly from WisdomTree Europe SmallCap Dividend Fund (DFE) – the first ETF solely focused on the performance of European small cap companies.
DFE tracks the WisdomTree Europe SmallCap Dividend Index, a fundamentally weighted index that measures the performance of the small-capitalization segment of the European dividend-paying market. The fund focuses more on sectors like Industrials, Financials and Consumer Discretionary and is quite popular with an asset base of more than $1.5 billion.
However, the fund, unlike SMEZ, holds a much larger basket of 246 stocks. Even for country allocations, DFE takes a different approach, focusing more on countries outside the Euro zone. U.K. occupies the top spot here, followed by Sweden and Italy. Moreover, Germany and France together form just 12% of fund assets as compared to a total of 50% allocation to these countries in the newly launched product from State Street.
However, the newly launched fund is slightly cheaper than DFE – which charges 58 basis points as fees. Thus, the fund will certainly gain interest among investors specifically looking for cheaper products. Ultimately, time will decide which of these two funds, SMEZ or DFE, becomes the dominant player in this increasingly important space.
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