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Worried About European Growth? Play These 5 ETFs

Sanghamitra Saha

On Feb 7, the European Commission reduced its forecast for economic growth in the Euro zone this year and the next to reflect an expected slowdown in the key economies of the bloc caused by global trade tensions and growing public debt.

The Commission now expects Euro zone growth to slow to 1.3% this year from 1.9% in 2018, though growth is expected to recoil in 2020 to 1.6%. The new estimates mark a sharp slowdown from the Commission’s previous forecast Euro zone growth for 2019 at 1.9% and growth at 1.7%.

Germany has been a laggard. German GDP growth is expected to slow to 1.1% this year from 1.5% in 2018. The Commission had earlier guided 1.8% growth for Germany this year. France, Italy, Spain and the Netherlands are also forecast to log slackening GDP growth (read: What Lies Ahead for German ETFs?).

Growth in this Britain-free bloc, as the country is planning to leave in March, is expected to slide to 1.5% this year from 2.1% in 2018. The bloc is likely to expand 1.8% next year. The inflation outlook of Euro Zone has also been cut to 1.4% in 2019 after 1.7% in 2018.

Reaction of Investing World

Stocks reacted negatively to the growth forecasts. The situation complicated amid concerns about no concrete resolution to the U.S. budget deal or trade tensions. The news from Europe crushed German equities, hurting the DAX Index the most since October, while bund yields slumped to the lowest since 2016. iShares MSCI Eurozone ETF EZU and Vanguard FTSE Europe ETF VGK lost about 2% and 1.5% on Feb 7, 2019 (read: Most Loved and Hated ETFs of 2018).

What About Investing Opportunities?

The cut in growth outlook ensures that the ECB will remain dovish (or continue the negative rates) in the near term, though the central bank ended its QE policy in December. Continuation of cheap money flows for a few more months may charge up the investing world though volatility will continue to pull the strings. Exposure to quality or value ETFs or some better-posiitoned European economies be a route to overcome extensive upheaval (read: ECB Ends QE: 5 ETF Areas Likely to Gain).

Against this backdrop, below we highlight a few Europe ETFs that could prove to be profitable in the medium term.

Pacer Trendpilot European Index ETF PTEU

The 311-stock fund seeks to track the total return performance of the Pacer Trendpilot European Index, which is derived from the FTSE Global Equity Index. The parent index covers 98% of the world’s investable market capitalization, providing coverage of the 11 developed markets in the Euro zone.

The index follows strategy directing exposure (i) 100% to the FTSE Euro bloc Ind, (ii) 50% to the FTSE Euro bloc Ind & 50% to 3-Month US T-bills, or (iii) 100% to 3-Month US T-bills, depending on relative performance of FTSE Euro bloc TR Ind & its 200-business day historical simple moving average. The strategy should safeguard investors from any sudden decline. The fund charges 65 bps.  

First Trust United Kingdom AlphaDEX Fund FKU

Britain's quarterly economic growth was 0.6% in Q3 of 2018, the strongest expansion since the last quarter of 2016 and following 0.4% growth in the previous period. Though Brexit is a concern, the Bank of England’s recent retreat from the multiple interest rate hike plans may boost U.K. equities.

iShares Europe Developed Real Estate ETF (IFEU)

A weaker economy means interests are going to remain at subdued levels for long. Already, German bund yields took a sharp dive. This should bode well for the rate-sensitive real estate sector ETF like IFEU. Germany (27.65%) and United Kingdom (26.46%) are the top two economies of the Euro zone.  Investors should note that the sector performs well in the low rate environment. The fund yields 4.44% annually and a great destinate for solid current income.

iShares MSCI Denmark ETF (EDEN)

Denmark has been practicing a negative rate policy since 2012, and the era is not going to change before 2021 the earliest, per the Danske Bank. The central bank’s goal is to protect the krone’s peg to the euro. The super-dovish policy helped the mortgage market to charge up, riskier securities get a boost and banks to indulge in wealth management.

First Trust STOXX European Select Dividend Index Fund (FDD)

This is yet another bet to earn strong income. The fund yields 4.72% annually. High-dividend paying equities are good sources to tide over the turbulent times. This is because even if there is a capital loss, high current income will make up for the loss to some extent.