Over the past several months, concerns over the fallout from the massive stimulus plans, rising unemployment, and continued weakness in corporate earnings have left many investors rethinking their allocations to U.S. equities. Once considered an essential element of any portfolio, American stocks have fallen out of favor with some investors who have shifted assets towards emerging markets and other regions (the number of ex-U.S. ETFs available is a testament to this trend). For investors disillusioned with prospects for American markets but unwilling to take on the risk inherent in emerging and frontier market funds, Europe may present an appealing option. Although the region has its share of economic turmoil (Ireland and the UK have been hit particularly hard), many investors believe the region’s economic prospects are much brighter than those of the U.S. And with green shoots now appearing throughout Europe, these ETFs may become more popular among U.S. investors seeking exposure to developed markets. But a word of warning: all Europe ETFs are not created equal.
Not surprisingly, iShares has established itself as the leader of country-specific European equity ETFs. While all of the iShares offerings are in the black so far in 2009, year-to-date performance has still varied wildly. Austria and Sweden lead the way, while Germany and Switzerland are hovering just above break-even on the year. Germany and Switzerland are expected to experience prolonged recessions, with the IMF projecting contractions in GDP in both 2009 and 2010 for these countries. While Austria and Sweden are experiencing sharp downturns at present, they are expected to eke out modest growth in 2010.
|Fund Name||Ticker||YTD Return|
|iShares MSCI Austria Index Fund||EWO||33.4%|
|iShares MSCI Sweden Index Fund||EWD||33.2%|
|iShares MSCI Belgium Index Fund||EWK||23.1%|
|iShares MSCI Spain Index Fund||EWP||16.4%|
|iShares MSCI UK Index Fund||EWU||15.7%|
|iShares MSCI Netherlands Index Fund||EWN||13.1%|
|iShares MSCI Italy Index Fund||EWI||6.9%|
|iShares MSCI France Index Fund||EWQ||6.2%|
|iShares MSCI Germany Index Fund||EWG||3.0%|
|iShares MSCI Switzerland Index Fund||EWL||2.5%|
In addition to company-specific Europe ETFs, there are also a number of well-diversified funds available. But the returns of these broad-based ETFs are also somewhat of a scattershot. Again, they’re all up on the year, but their returns over the first seven months of 2009 deviate significantly. Among the winners:
- PowerShares FTSE RAFI Europe Portfolio (PEF, up 23%): This ETF selects from large- and mid-cap European equities those with the highest fundamental value based on certain predetermined metrics. PEF has its largest holdings in the UK (31%) and France (15%), and maintains an expense ratio of 0.75%.
- WisdomTree Europe Small Cap Dividend Fund (DFE, up 19%): Unlike PEF, DFE focuses exclusively on small-cap companies – and weights its components based on annual cash dividends paid. DFE has an expense ratio of 0.58%.
- Vanguard European ETF (VGK, up 14.3%): Based on the MSCI Europe Index, VGK is perhaps the best-diversified, most broad-based European ETF. With an expense ratio of only 0.18%, it offers the best value in its class.
Several European ETFs lagged these top-performing funds by a considerable margin:
- WisdomTree Europe Total Dividend Fund (DEB, up 6%): DEB is similar to DFE in many respects: 1) UK and French equities account for the largest country allocations and 2) weightings are determined based on cash dividends paid. But whereas DFE invests exclusively in small-cap equities, DEB invests in a much broader group of equities, and small cap companies account for only about 5% of the fund’s assets. DEB has an expense ratio of 0.48%.
- SPDR Dow Jones EURO STOXX 50 ETF (FEZ, up 6%): FEZ tracks the Dow Jones EURO STOXX 50 Index, which represents approximately 60% of the Dow Jones EURO STOXX Total Market Index. FEZ is dominated by financial companies, which account for more than 30% of its holdings.
- First Trust Dow Jones STOXX Select Dividend 30 ETF (FDD, up 6%): FDD tracks an index comprised of 30 stocks from the Dow Jones STOXX 600 Index, a benchmark that includes high-yielding companies from 18 European markets. FDD has an expense ratio of 0.60%.
By comparison, SPY and DIA, which track the S&P 500 and Dow Jones Industrial Average, are up 9% and 4%, respectively, to date in 2009. For investors determined to gain their exposure to developed equity markets from beyond the U.S., the options for Europe funds are plentiful. They’re also far from homogeneous – each ETF offers very unique risk and return characteristics.
Disclosure: No positions at time of writing.