In broad terms, European equities have been decent though not spectacular performers this year. While some of the largest ETFs in the category have posted year-to-date upside, they continue to trail the upside of competing S&P 500 funds.
However, some experts are projecting that European stocks will accelerate in the second half. If so, the spotlight may be turning investor attention on ex-US developed market ETFs such as the ALPS O’Shares International Developed Quality Dividend ETF (OEFA). Sporting a year-to-date gain, OEFA isn’t a dedicated Europe ETF and that may be part of its allure. The ALPS ETF, which turns 11 years old in August, allocates a significant portion of its portfolio to European equities. Seven of its top 10 geographic weights are in European economies, which confirms that the fund is well positioned for across-the-pond upside.
Investors may want consider this positioning in the near-term. As Marina Zavolock, chief European equity strategist at Morgan Stanley pointed out, more high-level investors are expressing interest in diversifying portfolios that are currently heavily tilted to technology and U.S. equities. Adding exposure to Europe accomplishes that goal.
More European Tailwinds for OEFA
While European stocks have been lethargic this year, it could arguably be a case of market participants overlooking sturdy earnings growth — including gains from several European companies held by OEFA. “So, I think people may also be surprised to know that consensus earnings growth for Europe this year is over 16 percent,” noted Zavolock.
Provided that oil prices don’t spike anew, OEFA’s Europe sleeve could firm in the second half, especially since many European nations are net energy importers. Energy prices are also pertinent to this ETF because it allocates 16% of its portfolio to consumer discretionary stocks. If global energy prices are tolerable, then consumers have more excess capital to allocate to nonessential fare.
Another point in favor of OEFA as a backdoor play on Europe, is the fact that European stocks are closing a long valuation gap with their U.S. counterparts. This is a good thing because the narrowing of that gap is supported in part by the aforementioned earnings growth.
“Earlier this year, we broke out of a structural downtrend discount; that range that we were trading in versus the U.S.,” concluded Zavolock. “So, for almost 10 years, Europe’s discount was just going wider and wider and wider and wider. And as of January 1st, this year, on a like-for-like basis, so sector neutral excluding Mag7, we broke out of that structural downtrend, and we keep seeing a narrowing.”
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VettaFi LLC (“VettaFi”) is the index provider for OEFA, for which it receives an index licensing fee. However, OEFA is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of OEFA.
