At the moment, the European investment thesis is something of a dichotomy. On one hand, the global banking crisis is spooking investors about tapping an ETF tracking broad-based international equities, many of which are heavy on financial services stocks.
On the other hand, European equities are attractively valued relative to U.S. counterparts and are surprisingly resilient. Investors looking to split the difference between those scenarios can consider ETFs that mix European stocks with those from other ex-U.S. developed markets. That group includes the Calvert International Responsible Index ETF (CVIE).
CVIE offers another benefit in that it leverages environmental, social, and governance (ESG) standards. The ETF, which launched in January, allocates 25.7% of its weight to Japanese and Canadian stocks. The former is a potentially compelling trait. Japanese stocks are inexpensive and companies there are boosting shareholder rewards. Still, the rookie ETF is Europe-heavy, which could be a near- to medium-term benefit for investors.
“We see less downside risk to the European economy than that of the U.S., where many of the traditional economic leading indicators are down at recessionary levels,” noted Graham Secker, head of Morgan Stanley’s European equity strategy team. “In contrast, similar metrics for Europe, such as consumer confidence and purchasing managers indices, have actually been rising recently. In addition, a healthier and more resilient banking sector over here in Europe suggests there is potentially less risk of a credit crunch developing here than we see in the U.S.”
Use European Equities to Benefit From China Recovery
CVIE offers other perks. As Secker noted, European equities are an avenue through which investors can participate in China’s rebounding economy.
The Calvert ETF ups that proposition because country exposures such as Japan and Taiwan, which combine for over 20% of the fund’s roster, track that trend as well.
“While this is not necessarily manifesting itself in overall aggregate inflows into European equity funds at this time, we can clearly see the theme benefiting certain sectors, such as luxury goods, which has arguably become one of the most popular ways to express a positive view on China globally,” added the Morgan Stanley strategist.
Secker added that European retailers, diversified financials, media, chemicals, real estate, and software names currently offer investors attractive valuations. On that note, CVIE is relevant because the ETF allocates over 53% of its combined weight to the financial services, technology, consumer cyclical, and materials sectors.
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