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Bet on European Economic Recovery with This New ETF

Zacks Equity Research

Ongoing policy easing and hopes for further stimulus (if need be) have put the spotlight on the Euro zone stocks and related ETFs. Since available funds are tacking on gains and assets on a potential economic recovery, issuers are putting out all the stops in rolling out more and more innovative Europe-based funds.


Most recently, WishdomTree launched Europe Local Recovery ETF (EZR), which better reflects the European growth prospects on corporate profile.  Let’s dig a little deeper and find how one can wager on the potential bounce in the European economy by this ETF (read:ETF Strategies for 2H).


EZR in Focus

 

The fund seeks to provide exposure to the European companies susceptible to economic growth prospects in the Euro zone and that generate over 50% of their revenues from Europe. Thus the fund may benefit from the ongoing economic recovery and rising purchasing power in the Euro zone. By tracking the WisdomTree Europe Local Recovery Index, the fund fulfils its objective.


This strategy results in the fund holding 212 stocks in its basket, which are quite well diversified across the portfolio. The top 10 names form roughly 15% of total assets, with just 2.22% allocated to the top fund holding – Total SA. BASF SE, Allianz SE and BNP Paribas 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, Industrials and Consumer Discretionary– alone occupy four-fifth of total fund assets. Energy and Information Technology have the lowest allocations in the fund. Capitalization-wise, the fund has a mixed approach with about 35% of weight invested in small and mid caps each, while the remaining 30% goes to large-cap stocks.

 

While France and Germany have roughly 25% allocation each in the fund, Italy occupies about 16% and Spain has 9.42%. The fund charges 48 basis points as fees making it a relatively middle-of-the-road product in terms of costs in the European ETFs space.


How Does It Fit in the Portfolio?

 

The newly launched ETF can be a good choice for investors looking to gain exposure to the pure possibilities of the Euro zone. This is especially true given that these companies are closely tied to the European economy and generate a huge bulk of their revenues from the domestic market and thus remain less susceptible to euro depreciation (read: 3 European ETFs Rebounding Sharply).


Notably, Euro zone is presently undergoing a QE stimulus and the European central bank has recently hinted at the beefing up of the ongoing monetary policy, if growth slackens further. These measures are expected to spur bank lending, boost activities and battle low inflation within the Euro zone.

 

ETF Competition


The broad European equities fund space is teeming 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).


However, aforementioned ETFs are mostly large-cap in nature and thus can’t be direct competitors to this newbie ETF EZR. Since large-caps only take about one-third of its portfolio, small-cap Europe ETFs including SPDR STOXX Small Cap ETF (SMEZ) and WisdomTree Europe SmallCap Dividend Fund (DFE) are likely to pose as threats. In fact, country and sector specification-wise, EZR and SMEZ share many similarities.


The newly launched fund is cheaper than DFE – which charges 58 basis points as fees but it is slightly costlier than SMEZ which charges 45 bps in fees. Also, given the greenback strength in the wake of looming policy tightening and euro depreciation, this un-hedged ETF might see tough times ahead.


Otherwise, we expect EZR to be successful among risk-averse investors as capitalization-wise, its spectrum is diversified. So, several risk-fearing investors who seek to gain true exposure to the Euro zone but dread the volatile nature of the smaller-capitalization might find EZR’s midway approach lucrative.


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WISDMTR-EUR LRF (EZR): ETF Research Reports
 
VANGD-FTSE EUR (VGK): ETF Research Reports
 
SPDR-EU STX 50 (FEZ): ETF Research Reports
 
ISHARS-EURO (IEV): ETF Research Reports
 
SPDR-EU STX SC (SMEZ): ETF Research Reports
 
WISDMTR-EU SC D (DFE): ETF Research Reports
 
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