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3 ETFs to Capitalize Robust European Earnings - ETF News And Commentary

Zacks Equity Research

Finally, things have started to fall into place for Europe. The Euro zone has gathered steam, having logged a 0.4% growth rate in the first quarter – the highest quarterly growth in nearly 2 years and better than the U.S. growth rate (0.2%). The Q1 Euro zone data also inched up from 0.3% recorded in the fourth quarter of 2014.

The ECB’s QE launch appears instrumental in driving the region. The ECB started its bond buying program in March. The ECB will now inject €1.14 trillion ($1.16 trillion) into the sputtering Euro zone till September 2016. Added to this, many European nations have kept the key rates at rock-bottom levels and even introduced negative interest rates.

Solid Corporate Earnings

The ultra-easy policy backdrop has helped European companies to post solid earnings. Reuters recently indicated that European firms have seen the ‘best earnings season in four years’. Analyst upgrades overshadowed downgrades for the first time in four years, as per Reuters.
Reuters also revealed that about 80% European companies in the STOXX Europe 600 index are now out with Q1 earnings (based on a StarMine data). Among these, 61% of stocks have either surpassed or matched the estimates with 7% year-over-year growth on average.

Weaker Euro Not the Only Tailwind

Per the Thomson Reuters database, European EPS will likely increase 5.4% in 2015 though some analysts consider this a conservative prediction.  Many investors might be thinking that the exceptionally strong Q1 was the result of a weaker euro which in turn boosted the region’s exports (read: Bulls Riding Europe with These Top Ranked ETFs).

But Barclays’ stumped those investors showing that 50 stocks targeting the domestic market of the Euro zone reported sales and EPS that exceeded 50 export-oriented companies. This clearly points to the fact that the inherent Euro zone recovery was the main driver of a sound Q1 earnings season.

ETFs to Buy

Given robust corporate earnings and stimulus measures, Europe ETFs would be in the spotlight at least for the short term. Below are three ETFs that could be in focus for the coming days.


The passively managed fund looks to follow the STOXX Europe 600 Index to provide exposure to 600 largest European companies. Being just six months old, the fund has amassed only $5.4 million and charges 25 bps in fees.

The fund is highly diversified with no stock accounting for more than 2.79% of the portfolio. Among individual holdings, Novartis takes the top spot, followed by Nestle and Roche with, respectively, 2.64% and 2.18% exposure.

Sector wise, Financials gets the highest exposure with 23.36% of the portfolio. Health Care,
Consumer Staples, Industrials and Consumer Discretionary also get double-digit investments (read: Another Europe-Focused ETF from ALPS Hits the Market).

As far as country exposure is concerned, the fund is heavy on better-positioned nations. United Kingdom (28.76%) gets the top priority while France (14.88%), Switzerland (14.48%) and Germany (13.90%) take up the next three positions. The fund is up over 10.5% so far this year (as of May 18, 2015).

WisdomTree Europe SmallCap Dividend ETF (DFE)

This ETF provides exposure to the small cap segment of the European dividend-paying market by tracking the WisdomTree Europe SmallCap Dividend Index. It is one of the popular funds in the European space with AUM of $984.8 million. The fund charges 58 bps in annual fees from investors.

Investors should note that small cap companies generate the majority of their revenues from the domestic market. Moreover, they pick up faster than their larger counterparts in a growing economy. As a result, small-caps should be at the center stage in Europe (read: WisdomTree Plans Another Small-Cap Hedged Europe ETF).

The fund is heavy on industrials as this segment accounts for more than one-fourth of the portfolio while financials, information technology and consumer discretionary take the remainder. Among countries, United Kingdom (33.3%), Sweden (14.5%) and Italy (10%) dominate the holdings list. The fund is up over 19% so far this year (read: Watch These Europe ETFs If the ECB Prints Money).

iShares MSCI Europe Small-Cap ETF (IEUS)

The fund looks to give exposure to the small-cap space of the European market.  With 862 holdings in its basket, the fund allocates not more than 0.79% in a single stock. It is heavy on UK (39.26%) and charges 40 bps in fees. This fund is also low on assets with over $40 million amassed so far. Financials and Industrials take about 44% of the fund. Year to date (as of May 18, 2015), the fund has added over 17%.

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ALPS-STX EUR600 (STXX): ETF Research Reports
WISDMTR-EU SC D (DFE): ETF Research Reports
ISHARS-MS EU SC (IEUS): ETF Research Reports
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