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Eurozone ETFs in Focus on Weak PMI Data

Sweta Killa

Eurozone economy has been going through tough times as third-quarter end approaches on falling demand for goods and services. This is especially true as IHS Markit Composite Purchasing Managers’ Index (PMI) dropped to 50.4 in September from 51.9 in August. This represents the weakest expansion of output across manufacturing and services since June 2013. The persistent global trade disputes and the prolonged process involving the Britain exit from the European Union have been primarily responsible for the slowdown.

The 19-member bloc’s manufacturing sector activity continues to deteriorate and remains in contraction territory this month. Output fell at the sharpest pace since 2012 and service sector expansion also slowed down. Manufacturing PMI dropped to the worst level in nearly seven years in September while services PMI dropped to eight-month lows (see: all the European ETFs here).

Eurozone's largest economy — Germany — saw the output falling for the first time since April 2013 and the rate of decline hitting the steepest since October 2012. Manufacturing activity suffered the second-largest drop since June 2009 while services growth slipped to the weakest level so far this year. Output growth also slowed to a four-month low in France, Eurozone’s third-largest economy, with manufacturing output falling for the eighth time in the past 12 months and service sector deteriorating to the weakest since May.

Growth in the rest of the euro area hit the lowest since November 2013. Manufacturers witnessed the steepest drop in output since May 2013 while service sector activity growth eased to a four-month low.

Any Hope?

In order to prop up the ailing Eurozone economy, the European Central Bank (ECB) cut interest rates deeper into negative territory and promised an indefinite supply of fresh asset purchases.

The ECB cut the deposit rate by 10 bps to -0.5% and launched a quantitative easing (QE) program set to begin from Nov 1. The QE program will call for asset purchases worth 20 billion euros per month for as long as the economy needs. This marks the second round of QE from the ECB, the first having occurred four years ago (read: ETFs to Gain & Lose as ECB Starts QE, Cuts Rates).

ETFs to Watch

Given the monetary easing policies, investing in a Eurozone ETFs could be a good idea. Below we have highlighted some of these.

iShares MSCI Eurozone ETF EZU

This product provides exposure to developed market countries using the euro for currency and by tracking the MSCI EMU index. It holds about 250 securities in its basket with each accounting for less than 3% share. The fund is widely spread across sectors with financials, industrials, consumer discretionary and consumer staples taking a double-digit allocation each. From a country look, France and Germany take the biggest share in the basket with 35.3% and 26.7%, respectively. EZU is one of the most popular ETFs in the broader European space with AUM of $5.4 billion and average daily volume of more than 4.1 million shares. It charges investors 0.47% in annual fees and has a Zacks ETF Rank #3 (Hold).

SPDR EURO STOXX 50 ETF FEZ

This fund follows the EURO STOXX 50 Index, which measures the performance of some of the largest companies across the components of the 19 EURO STOXX Supersector Indexes. The fund appears rich with AUM of $2.1 billion and average daily volume of around 3 million shares. It charges 29 bps in annual fees and holds 50 securities in its basket with each firm accounting for less than 5.2% of the assets. The ETF is pretty well spread across sectors with financials, consumer discretionary, industrials, consumer staples and information technology making up for double-digit allocation each. In terms of country allocation, France and Germany lead with 38.6% and 27.6% share, respectively, followed by the Netherlands (10.8%), Spain (9.4%), and Italy (4.8%). The product has a Zacks ETF Rank #3.

First Trust Eurozone AlphaDEX ETF FEUZ

This fund follows the Nasdaq AlphaDEX Eurozone Index and employs the AlphaDEX stock selection methodology to select stocks from the NASDAQ Eurozone Index. Holding 150 stocks in its basket, the fund is well spread out across components with none holding more than 1.41% of the assets. Here also, Germany and France take the top two spots in terms of country exposure with 29.1% and 23.1%, share, respectively. The product has accumulated $51.7 million in its asset base while trading in volume of 11,000 shares a day on average. It charges 80 bps in expense ratio and has a Zacks ETF Rank #4 (Sell).

Xtrackers Eurozone Equity ETF EURZ

This ETF is an unpopular and illiquid choice in the Eurozone space with AUM of just $5.5 million and average daily volume of 3,000 shares. It tracks the NASDAQ Eurozone Large Mid Cap Index and holds 296 stocks with each accounting for less than 3% share. Financials, industrials and consumer discretionary are the top three sectors with double-digit exposure each. Here too, France and Germany take the largest share at 34.9% and 27.1% of the assets, respectively. EURZ has an expense ratio of 0.09% and a Zacks ETF Rank #3 (read: Large Cap ETFs Hit All-Time High).

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