European equities and related ETFs are among the leading Q1 trades, powered significantly by large-caps. That’s the result of investors embracing European industrials amid expectations countries there will largely boost defense spending.
Not to be lost in the shuffle are resurgent European small-caps. Just look at the WisdomTree Europe SmallCap Dividend Fund (DFE ) and the WisdomTree Europe Hedged SmallCap Equity Fund (EUSC ). EUSC is close to keeping pace with large-cap Europe ETFs. It’s doing so with significantly less annualized volatility.
EUSC is up 13.2% YTD, while the Russell 2000 and S&P SmallCap 600 indexes are both in the red. Plus, both DFE and EUSC are providing investors with considerably fewer bumps than they’re encountering with domestic small-caps. For investors who glossed offer DFE and EUSC to start 2025, the good news is some market observers see more upside in store for European small-caps as this year moves along.
DFE, EUSC Have Tailwinds
Bank of America (BofA) strategists recently highlighted several factors that could portend more upside for DFE and EUSC this year. For starters, the bank expects eurozone economic growth, helped by monetary easing, to accelerate this year. That could support upside for both DFE and EUSC, But it particularly support the latter because nearly all of its geographic exposures are eurozone economies.
BofA strategists added that if Russia and Ukraine finally end their war, that would also be constructive for European small-caps.
“Further supporting the case, BofA expects the negative impact of euro weakness on domestically-focused small caps to diminish, contrasting with globally-exposed large caps, rreported Investing.com.
Still, the conflict is an impetus for European countries to lift defense spending. That’s a theme to which both DFE and EUSC are levered because industrials are by far the largest sector weight in both ETFs. The quality attributes offered by both ETFs could also be sources of allure for investors seeking more international diversification. That’s because the quality factor could support the next leg up for European stocks, including smaller names.
Attractive Entry Point
“We see a particularly attractive entry point for European quality stocks, which tend to outperform when bond yields decline and are currently trading at a five-year low relative to the market, following 7% underperformance over the past year,” concluded Bank of America.
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