Follow Goldman With These European ETFs
Investment across the pond has become interesting all over again. With the Euro zone finally being saved from being broke and ‘Grexit’ being averted by an eleventh-hour debt deal, month-long anxieties over the fate of euro are running low. This has helped the European stock markets, which were in red for the last one month, to settle down.
Investors who turned away from Europe last month now can consider entering this space to cash in on the European Central Bank’s (ECB) ongoing QE program, a fragile euro and rebounding fundamentals. Goldman Sachs is also supportive of this view and recently upgraded its outlook on European stocks to "Overweight" from "Neutral."
The STOXX Europe 600 has jumped about 10% in the last two weeks, as the gridlock between Greece and its international lenders eased.
Goldman: Dump U.S. & Stack European Stocks
Along with upgrading the European stocks, the investment bank downgraded the U.S. stocks. This was due to diverging monetary policies in both continents. While the Fed is preparing for an interest rate lift-off, the ECB is applying an ultra-loose monetary tool. The investment forecast is that by the end of 2015, European stocks should outperform our domestic equities.
In any case, the 19-member Euro zone economy had a strong start to 2015 on the back of the stimulus measure. The economy grew 0.4% in the first quarter and outshined the 0.2% growth for the U.S. in the same period. The first quarter represented the highest quarterly Euro zone growth in nearly two years. Moreover, the inflationary scenario is looking better despite lower global oil prices.
Success of QE
Previously, QE had proven extremely beneficial for the U.S. and Japanese markets. During the QE era, the key U.S. benchmark S&P 500 skyrocketed about 120%. Another example is the Japan model which basically bears a resemblance to the Euro zone issues, i.e. a long deflationary streak and weak growth. Japan’s key benchmark Nikkei index soared about 70% since the initiation of QE. On the other hand, Stoxx Europe 600 index has returned investors just 5.7% so far, promising more room for future growth.
Interesting Valuation
This clearly explains the reason behind our optimism over the European stocks. Moreover, after a month-long sell-off, all these equities and related ETFs are trading at a low valuation giving another reason for value investors to play. WisdomTree Europe Hedged Equity Index Fund (HEDJ) is presently trading at 17 times P/E (ttm) compared with 18 times offered by the ultra-popular U.S. ETF SPY (read: Great ETF Picks for 2nd Half of 2015).
Bright Outlook
Buoyed by this fundamental trait, Moody’s is likely to upgrade its outlook on the banking systems in the majority of the Euro zone countries. Moody's has by now boosted its outlook for the Spanish and French banking system to positive from negative and to stable from negative, respectively. According to JPMorgan, European corporate profits are now looking positive after “five years of basically no earnings growth.” All these set the stage for bullish European equities play.
For interested investors, we have found a number of top-ranked ETFs in the broad European space that have a Zacks ETF Rank of 1 or ‘ Strong Buy’ rating and are thus expected to outperform in the upcoming months (see: all the Top Ranked ETFs).
HEDJ in Focus
This fund follows the WisdomTree Europe Hedged Equity Index, which measures the performance of European equities while mitigates the impact of a weaker euro. The fund appears rich with AUM of nearly $22 billion, and average daily volume of more than 5 million shares. Expense ratio comes in at 0.58% (see: all the European ETFs here).
Holding 131 securities in its basket, the product is pretty well spread out across components with no firm making up for more than 5.82% of assets. Industrial, Consumer Staples, Consumer Discretionary, Financials and Health Care have double-digit weight in the fund.
In terms of country allocations, Germany and France are leading with 25% and 24.4% share, respectively, followed by Spain (19%) and the Netherlands (16.2%). The fund is up over 18.5% in the year-to-date time frame (as of July 22, 2015).
WisdomTree Germany Hedged Equity ETF (DXGE)
This product provides exposure to the strongest economy of the Euro zone, Germany. With the abating Greek tensions, Germany has emerged as a lucrative investment proposition since the country was one of the largest creditors of Greece.
DXGE has amassed AUM of nearly $411 million and average daily volume of more than 250,000 million shares. It charges investors 0.48% in annual fees (read: 3 Best Performing ETF Sectors of Q1 2015).
The fund holds about 78 securities in its basket with none holding more than 6.24% share. The product has a tilt toward Consumer Discretionary at 21.4%, followed by Financials (18.53%), Industrials (15.83%) and Materials (14.09%). The fund has advanced 15.8% so far this year (as of July 22, 2015).
iShares Currency Hedged MSCI EMU ETF (HEZU - ETF report)
This fund follows large- and mid-capitalization equities from developed market countries within the European Monetary Union and mitigates the Euro exposure. It appears rich with AUM of nearly $1.71 billion, and average daily volume of more than 1 million shares. Expense ratio is 0.51%.
The ETF is skewed toward Financials, as it takes about one-fourth of the total assets, while Consumer Discretionary (14.6%), Industrials (12.5%) and Consumer Staples (10.44%) round out the next three spots. In terms of country allocations, France and Germany are leading with 31.5% and 29.1% share, respectively. The fund is up nearly 19% in the year-to-date time frame.
Disclosure: None.