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4 European ETFs to Buy on Cheaper Valuations, QE Launch - ETF News And Commentary

Europe has been hitting headlines the world over since the beginning of this year on deflation fears, a multi-year low euro, the beginning of QE, decoupling of the Swiss franc from euro and the political gridlock in Greece.

In fact, the root of the debt-debacle was so deep that after rebounding from an 18-month long recession in the second quarter of 2013, the Euro zone once again slipped into a deflationary spiral to close out 2014.

The latest forecast by World Bank is that low inflation will continue in the Euro zone, which will grow 1.1% in 2015 (down from the earlier forecast of 1.8%) and 1.6% in 2016–17. As a result, the European Central Bank (ECB) took one last shot at its policy easing in the form of a full-fledged QE launch, with the possibility of a 1.1 trillion euro program hitting the markets over the next year and a half.

Thanks to the renewed economic pessimism in the bloc, the European stocks and the related ETFs were ruthlessly punished last year leading most products to trade in red. Despite pricing in the potential QE impact, the ETFs presently have cheaper valuations. Investors should note that the broader European ETF Vanguard FTSE Europe ETF (VGK) presently trades at P/E (ttm) of 15 while the biggest ETF representative of the U.S. market, SPDR S&P 500 ETF (SPY), trades at P/E (ttm) of 17.

In such a situation, when most investors are clueless about their Europe holdings and are busy unloading Europe ETFs to take a defensive stance, many may hunt for quality exposure in the continent to earn some quick gains by investing in high-potential yet undervalued European ETFs. For these investors, we highlight below a few ETFs which could be ones to watch in the days and weeks ahead (read: Watch These Europe ETFs If the ECB Prints Money).

Global X FTSE Portugal 20 ETF (PGAL)

The Portuguese economy, which left a three-year long bailout from the European Union and International Monetary Fund in May, grew 0.3% sequentially in Q3 of 2014. The nation’s economy minister expects economic expansion at the fastest clip in 2015 since 2007, should oil prices stay low. GDP may grow in excess of 2% in 2015, per the minister. With oil prices maintaining the steep downhill ride, Portugal ETF, PGAL, should perform well ahead.

The $23.7 million PGAL tracks the Global X FTSE Portugal 20 Index and holds a small basket of 20 stocks. The fund charges 61 bps in fees. Sector wise, the fund is heavily weighted toward the Utilities (28.9%) and Financials (19%) sectors. PGAL was up 3.7% in the last five trading sessions and 1.3% in the year-to-date frame (as of January 19, 2015).

Shares MSCI Ireland Capped ETF (EIRL)

Ireland is the first Euro zone nation that came out of the bailout program in December 2013 and is presently one of the fastest growing in the pack. The ongoing fiscal consolidation, reviving domestic demand and improvement in the property market are presently supporting Irish economic growth.

The government expects to see a single-digit unemployment rate by the end of 2015. Given the improving fundamentals of this economy, we believe Ireland is a good investment choice in the European equities space (read: Ireland ETF in Focus on S&P Upgrade).

The $80 million-fund holds a small basket of 28 stocks and charges 48 bps in fees. The product is heavily concentrated in its top three holdings – CRG, Kerry Group plc and Bank of Ireland – which together form about 44% of total fund assets. Sector wise, Materials, Consumer Staples and Industrials combine to make up 70% of the total fund assets. The ETF returned about 0.8% last week, while it is off 1.1% so far this year.

iShares Currency Hedged MSCI Germany ETF (HEWG)

Germany is the largest economy of Europe and long considered the region’s growth engine. As per the latest report issued by Bundesbank, “The German economy appears to have overcome the phase of weakness that emerged last spring more quickly than many people expected.”

Favorable job data and reduced energy prices boosted business and consumer sentiments, per the bank. As of now, the German economy is believed to have expanded faster in Q4 and logged a 1.5% growth rate in 2014. However, given a tumbling euro and the prospects of the currency going even lower, a currency hedged version is preferable while considering investments in Germany (read: Guide to Currency Hedged Germany ETF Investing).

The $165 million fund tracks the MSCI Germany Index while mitigating exposure to fluctuations between the value of the euro and the U.S. dollar. The fund spreads out its assets well across various sectors with Consumer Discretionary, Financials and Health Care taking the top three spots. The fund, which charges 53 bps in fees, was up 5.8% in last week and 5.4% in the year-to-date frame (as of January 19, 2015).

WisdomTree Europe Dividend Growth Fund (EUDG)

As part of its accommodative monetary policy, the ECB maintains a key interest rate of 0.05% and a negative deposit rate of 0.2%. Given such a muted rate environment, dividend investing in Europe can be enticing to yield-hungry investors. This is especially true for an ETF like EUDG, the underlying index of which screens stocks on growth factors like long-term earnings growth expectations and quality factors like return on equity, and return on assets.

The $13 million fund is tilted toward Switzerland (25.5%), the United Kingdom (23.3%), and Germany (16%). The top sectors of the fund are Health Care (21.9%) and Consumer Staples (21.8%) which are defensive in nature. EUDG is up 1.6% so far this year and added about 3.2% last week (read: New Dividend Growth ETF Duo from WisdomTree Hits Market).

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GLBL-XF PORTG20 (PGAL): ETF Research Reports
ISHA-CH MS GERM (HEWG): ETF Research Reports
WISDMTR-EU DG (EUDG): ETF Research Reports
ISHARS-MS IRLND (EIRL): ETF Research Reports
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