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Inside the Surprising European ETFs Surge

Sweta Killa

European stocks have been badly beaten down over the past few months on looming concerns over the continent slipping into another recession. This sentiment seems to be reversing lately on a spate of positive news out of Europe.

This is especially true as the Stoxx Europe 600 index strongly rebounded from its 52-week low of $302.48 reached in mid October, climbing nearly double digits. Robust corporate earnings triggered most of the gains as the majority of European companies beat estimates in Q3. As per Reuters, net earnings for 36% of total market capitalization reported so far are up 7.1% on almost flat revenues with beat ratios of 67% and 59%, respectively.

Secondly, the latest Euro zone surveys suggest a spike in overall activity in Euro zone and a resultant improvement in its economy. Notably, economic sentiment here rose to 100.7 in October from an almost one-year low of 99.7 in September. The improvement was broad based with all the sectors, in particular retail, services, and construction, spreading optimism into the struggling economy. The PMI composite index also increased to 52.2 from 52.

While Euro zone is showing signs of revival, inflation fell to a 5-year low in September raising hopes of further stimulus measures from the European Central Bank (:ECB) anytime soon. The ECB has acted twice this year against deflation fears to boost economic growth (read: 3 European ETFs Worth Considering on ECB Measures).

In September, the bank launched a program to buy asset-backed securities and covered bond in addition to cutting interest rate. Now, the bank is planning to buy corporate bonds in the secondary debt markets to allow companies to access cheaper credit easily. This speculation also spread an air of optimism pushing the stocks higher.

Positive stress test results also spurred the rally. European banks emerged healthier with more than 80% proving their ability to endure another financial crisis or economic downturn. Moreover, better-than-expected growth in the U.S. economy cannot be discounted in our version on the uptrend in European shares.

Given this, several European ETFs have delivered handsome returns over the past 10 days. Below, we have highlighted four funds that target the broad European market rather than any specific region and have been the star performers gaining in over 6%. Any of these could be profitable plays in the tail end of the year (see: all the European ETFs here).

WisdomTree Europe SmallCap Dividend Fund (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 $835.8 million and average daily volume of around 372,000 shares. The fund charges 58 bps in annual fees from investors.

Holding 353 stocks in its basket, the product is widely diversified across a number of securities as none of these holds more than 1.85% of assets. However, the fund is heavy on industrials with more than one-fourth of the portfolio while financials, information technology and consumer discretionary collectively make up for another two-fifth share. Among countries, United Kingdom (32.7%), Sweden (13.9%), Italy (9.7%) and Germany (8.2%) dominate the holdings list.

Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU)

This fund offers exposure to 438 European stocks in the developed market while at the same time provides a hedge against any fall in the euro. This will be done by tracking the MSCI Europe US Dollar Hedged Index. DBEU is also well spread across a number of securities with each holding less than 2.9% share. United Kingdom takes the top spot at 28.5% while Switzerland, France and Germany round off to the next three spots.

From a sector look, financials account for the largest share at 23% closely followed by consumer staples (18.76%). Other sectors make up for a nice mix in the portfolio with a single-digit allocation. The fund has amassed $467.7 million in its asset base while trades in good average daily volume of more than 192,000 shares. Expense ratio came in at 0.45% (read: Buy these 2 Hedged Europe ETFs after ECB action).

First Trust STOXX European Select Dividend Index Fund (FDD)

This ETF follows the STOXX Europe Select Dividend 30 Index, providing exposure to high-dividend yielding companies across 18 European countries. In total, the fund holds 31 securities with the largest allocation going to Belgacom at 6.8%. Other firms account for less than 5.1% share. Here again, United Kingdom, Switzerland and France make up for the top three country holdings.

The fund is tilted toward financials at 41.1% while utilities, telecommunication services and energy account for double-digit allocation. The fund is rich in AUM of $156.2 million and sees good trading volume of around 146,000 shares per day. It charges 60 bps in annual fees and expenses.

iShares MSCI Europe Minimum Volatility ETF (EUMV)

This fund has recently been introduced into the space and has accumulated $3.5 million within five months of its debut. It tracks the MSCI Europe Minimum Volatility Index giving exposure to 123 European stocks having lower volatility characteristics relative to the broader European developed equity markets. The product charges a bit cheaper fee of 25 bps a year while average daily volume is paltry at about 8,000 shares (read: Three Global Low Volatility ETFs Debut from iShares).

Like many other funds in the space, the ETF provides higher diversification benefits with none of the securities making up for more than 10.81% of assets. Additionally, all the sectors make up for nice mix in the portfolio with financials, health care and consumer staples taking the top three spots. In term of country exposure, United Kingdom takes the largest share at 33.3%, followed by Switzerland (18.7%), Germany (10.2%) and France (10%).

Bottom Line

These products easily outperformed the broad European fund (VGK) in the recent weeks by wide margins, suggesting a positive shift in the momentum of the European outlook as we approach the end of this year.

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Read the analyst report on DFE

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