Amid political tensions ahead of elections in some of the biggest economies, the Eurozone has been shining this year. This is especially true as the economy enjoyed its strongest quarter in nearly six years buoyed by strengthening business and factory activity.
A broad gauge of economic activity for the 19-member bloc – the final IHS Markit Composite Purchasing Managers’ Index (PMI) – jumped to 56.4 in March from 56 in February. This index expanded in each of the past 45 months, reflecting accelerated pace of growth. The data suggests broad-based recovery with Germany, Europe’s largest economy, leading the way, followed by Ireland, Spain and France.
The major threat to Eurozone – increased unemployment and deflation – that pushed the economy into recession was abated fully. This is because unemployment across the Eurozone dropped to a nearly eight-year low to 9.5% in February. Czech Republic and Germany have lower unemployment rates of 3.4% and 3.9%, respectively, while Greece and Spain have the highest rates of 23.1% and 18%, respectively.
Meanwhile, inflation is near the European Central Bank (ECB) target of 2%, indicating that Eurozone is clearly out of a deflationary spiral. While inflation plunged to 1.5% in March and falls below the ECB target, the slowdown seems temporary caused by lower energy prices (see: all the European ETFs here).
Given encouraging fundamentals, the ECB raised the growth outlook for Eurozone from 1.7% to $1.8% for this year and from 1.6% to 1.7% for the next. Inflation is expected to reach 1.7% this year and 1.6% in the next, up from the previous forecast of 1.3% and 1.5%, respectively.
Further, ECB will continue with its unprecedented easing measures to stimulate the Eurozone economy even after the faster-than-expected rebound in inflation and growth. The central bank has kept its interest rates unchanged in the negative territory and bonds purchases at €80 billion a month.
Apart from improving economic fundamentals, the end of earnings stagnation has instilled confidence in the stocks. Fourth-quarter 2016 marked return to earnings growth for the first time in four years and improved earnings estimates for the group for the next quarters.
Moreover, Eurozone stocks seem attractive at current levels. Per many analysts, these stocks are the cheapest relative to U.S. stocks in many years, making them an attractive buys even with looming political risks (read: Are European ETFs a Good Buy Amid Political Uncertainty?).
ETFs to Consider
As such, we have highlighted a number of ETFs having exposure to these economies that could be considered great plays given the current trends and increasing confidence. All these funds have a Zacks ETF Rank of 3 or ‘Hold’ rating, hinting at upside in the coming months. Additionally, these funds have enjoyed strong momentum and generated handsome returns in the year-to-date period.
iShares MSCI Eurozone ETF EZU
This product provides exposure to developed market countries using the Euro for currency by tracking the MSCI EMU index. It holds about 247 securities in its basket with none holding more than 2.82% 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 32.1% and 29.8%, respectively. EZU is one of the most popular ETFs in the broader European space with AUM of nearly $9.3 billion and average daily volume of more than 4.9 million shares. It charges investors 0.48% in annual fees and has gained 7.5% so far this year (read: Europe ETF Hits New 52-Week High).
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 20 EURO STOXX Supersector Indexes. The fund appears rich with AUM of $2.7 billion, and average daily volume of around 2.2 million shares. Expense ratio comes in at 0.29%. Holding 55 securities in its basket, the product is pretty well spread out across components with each firm accounting for less than 5% of assets. However, it is slightly tilted toward the financial sector at 21.8% while industrials, consumer discretionary, consumer staples and healthcare round off the top five. In terms of country allocation, France and Germany are leading with 35.6% and 33.9% share, respectively, followed by Spain (10.6%), the Netherlands (9.6%), and Italy (4.6%). The fund is up 7.7% in the year-to-date timeframe.
SPDR STOXX Europe 50 ETF FEU
This ETF has amassed $177.2 million in its asset base and trades in volumes of 51,000 shares per day. It charges 29 bps in annual fees and holds 58 stocks in its basket. While the fund tracks the same index as of FEZ, it is slightly different in terms of sector and country holdings. Here, financials, healthcare, and consumer staples take the top two spots in terms of sectors with over 20% share each. Country weights for the top three are 33.1% for the United Kingdom, 20.5% for Switzerland and 15.7% for Germany. The product has gained 7.3% so far this year.
SPDR STOXX Europe 50 ETF HEZU
For investors looking to manage currency risk while remaining invested in the Euro zone stocks, HEZU might be a good option. The fund follows the MSCI EMU 100% USD Hedged Index and is a play on the popular unhedged fund (EZU) with a hedge to strip out the euro currency exposure. It has amassed $1.3 billion in its asset base and trades in good volumes of 790,000 shares a day. The fund charges 51 bps in annual fees from investors and has gained about 6.9% so far this year (read: Profit from Currency Hedged ETFs If Euro Falls to Parity).
Deutsche X-trackers MSCI Eurozone Hedged Equity ETF DBEZ
This ETF follows the MSCI EMU IMI U.S. Dollar Hedged Index, which provides exposure to the Eurozone equity market and hedges the euro to the U.S. dollar. Holding 709 stocks in its basket, the fund is well spread across components with each holding no more than 2.4% share. From a sector look, financials, industrials and consumer discretionary are the top sectors with a double-digit allocation each. The fund managed assets worth $51.8 million and sees lower volume of about 18,000 shares a day. Expense ratio comes in at 0.45%. DBEZ is up 7.2% so far this year.
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ISHARS-EMU IDX (EZU): ETF Research Reports
DEUTS-XT MS EMU (DBEZ): ETF Research Reports
SPDR-EU STX 50 (FEZ): ETF Research Reports
ISHARS-CH MS EM (HEZU): ETF Research Reports
SPDR-STX EU 50 (FEU): ETF Research Reports
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