Ultimate Guide To Vanguard MSCI Europe ETF (VGK)

by on October 15, 2012 | ETFs Mentioned:

The Vanguard MSCI Europe ETF (VGK) tracks the MSCI Europe Index and is one of the most cost effective ways to gain exposure to the leading companies based in Europe. Overall, developed European markets can offer a comparable risk and return profile to U.S. stocks, while still helping investors to geographically diversify their portfolio’s equity component. More contrarian-minded investors may also want to look to Europe for its recovery potential following sovereign debt worries and slowing economic growth in the region [see Free Report: How To Pick The Right ETF Every Time].

In A Nutshell

VGK is made up of common stocks of approximately 462 companies located in 16 European countries. The countries with the largest capitalization weightings in the index are the United Kingdom, France, Germany and Switzerland. The others countries represented are Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain and Sweden [see also Euro Free Europe ETFdb Portfolio].

The ETF was launched on March 4, 2005 by Vanguard. VGK follows a passively managed, full-replication approach that is intended to closely match the underlying index. This ETF recently had $3.7 billion in total assets under management.

What Makes VGK Unique

VGK offers a slightly higher market capitalization exposure compared to its peer group average. Overall, VGK is comprised of over 400 securities, which compares favorably to the popular S&P 500, and index of 500 companies. As expected, the fund’s market cap-weighted methodology gives it a tilt towards well-known multinational companies [see 101 ETF Lessons Every Financial Advisor Should Learn].

How It Fits

VGK’s appeal is fairly straightforward as the fund boasts a low cost and features exposure to a balanced portfolio based off the MSCI Europe Index. As such, VGK can serve as both a core or complimentary holding in long-term, buy-and-hold portfolios depending on individual objectives and risk preferences.

What It’ll Cost You

According to the Vanguard prospectus, VGK has an expense ratio of 0.14%; by comparison, the Europe Equities ETFdb Category range is 0.14% – 0.8% and the average is 0.55%. From a cost perspective, VGK certainly falls towards the “cheap” end along the expense spectrum. Furthermore, this ETF is available for commission free trading to TD Ameritrade and Vanguard account holders.

Under The Hood

VGK is well-balanced from a sector breakdown perspective with financial services accounting for the biggest chunk of assets. The top five sectors represented in VGK include Financial Services, Consumer Defensive, Healthcare, Energy, and Industrials. The top five stocks held include Nestle SA, HSBC Holdings, Vodafone Group, Novartis AG and BP [see VGK Realtime Rating].

By country, U.K.-based stocks account for one-third of total assets; France, Switzerland and Germany account for the next biggest chunks from a country-breakdown perspective. In terms of market capitalization, large-cap stocks make up the vast majority of holdings at over three-quarters of total assets. Mid-cap stocks also receive meaningful exposure while small and micro-cap companies account for by far the smallest chunk of the portfolio.

Overall, VGK represents exposure to a well-rounded portfolio that offers a higher degree of mid and smaller cap exposure compared to competing ETFs and funds in the space.

Yield, Volatility and Performance

This ETF offers an annual dividend distribution and its expected volatility should fall in line with broad U.S. markets but below emerging market benchmarks. From a performance perspective, VGK fell alongside major equity indexes during the 2008 slump, shedding  44% that year. As expected, this ETF recovered alongside major equity benchmarks in the following years; VGK managed to clinch gains of roughly 31% in 2009 and 6% in 2010. This ETF turned in a negative performance in 2011, dropping 11% during a very choppy year for stock markets [see VGK Returns].

Other Options

The ETFs profiled below offer generally similar exposure as VGK, although there are a number of distinguishing characteristics to each one:

  • iShares MSCI Germany Index Fund (EWG): This is the biggest fund in the Europe Equities space that offers country-specific exposure to the regions’ economic powerhouse.
  • iShares MSCI EMU Index Fund (EZU): This ETF offers exposure to members of the European Union who have adopted the euro as their currency.
  • WisdomTree Europe SmallCap Dividend Fund (DFE): This fund targets small-cap, dividend paying securities in this region.
  • Global X FTSE Nordic Region ETF (GXF): This ETF focuses on the financially-sound Nordic region of Europe, which includes Sweden, Denmark, Norway, and Finland.

Disclosure: Long shares HSBC