Thanks to reduced debt worries, strong growth in some of the key members and solid data, the European economy has nicely rebounded over the past couple of months. Though the Euro zone emerged from a long 18-month recession, the growth seems fragile and closer to a standstill.
This is because the Euro zone economy grew just 0.1% in the third quarter compared to 0.3% in the second. The biggest European economy – Germany – is showing signs of a slowdown while economic growth in France surprisingly contracted in the third quarter. Italy continued to shrink and entered into the third year of recession (read: 3 European ETFs Leading the Recovery).
Further, tumbling inflation and higher unemployment is stalling the burgeoning Euro zone economic recovery. Inflation dropped well below the 2% annual target to 0.7% in October while unemployment remained at a record high of 12.2%.
In order to support growth in the Euro zone, the European Central Bank (ECB) recently cut its benchmark rate to a record low of 0.25%. If that wasn't enough, the ECB might introduce a negative deposit rate as and when required too (read: Euro ETFs in Focus After Surprise ECB Rate Cut).
According to Bloomberg, the rate for commercial lenders could fall to -0.1% from the current zero level. This would be the first time that the central bank adjusts rates by less than a quarter percentage point. This measure will likely increase lending and boost inflation closer to the target rate.
Based on the improving fundamentals, European stocks have moved back on track lately and the related ETFs are seeing huge fund inflows. For investors interested to participate in the recovery, a focus on top ranked Europe ETFs could be a less risky way to tap the same broad trends.
These products offer exposure to the broad European economy rather than a particular nation and thus may be better picks at this time for some investors (see: all the European ETFs here).
Top Ranked European ETF in Focus
We have found a number of ETFs that have the top Zacks ETF Rank of 1 or ‘Strong Buy’ rating in the broad European space and are thus expected to outperform in the months to come (read: all the Top Ranked ETFs).
While all these top ranked ETFs are likely to outperform, the following three could be good choices to tap into the space. This trio has enjoyed a strong momentum in the year-to-date period, and al have potentially superior weighting methodologies which could allow for these to continue leading the European space in the months ahead.
First Trust Europe AlphaDEX Fund (FEP - ETF report)
This fund provides a slightly active choice as it uses the AlphaDEX methodology to select the stocks. The methodology seeks to narrow the European space to only the best positioned companies. It ranks the stocks by various growth and value factors, eliminating the bottom ranked 25% of the stocks.
This approach produces a basket of 201 stocks, which is widely spread across various nations and securities as each security holds less than 1% of assets. France (18.62%), United Kingdom (17.16%) and Germany (11.38%) occupy the top three positions in terms of country exposure. However, the product is tilted toward financial sector at 21.35%, closely followed by industrials (17.72%) and consumer discretionary (17.41%).
The fund has gathered more than $237 million of assets this year, propelling the total base to $283.5 million. The product trades in good volume of nearly 94,000 shares per day while it charges a bit higher 80 bps in annual fees. The ETF returned over 23.5% in the year-to-date time frame.
SPDR STOXX Europe 50 ETF (FEU - ETF report)
This fund follows the STOXX Europe 50 Index, which measures the performance of some of the largest companies across the components of the 20 EURO STOXX Supersector Indexes. The fund appears rich with AUM of nearly $148 million, out of which $92 million was pulled in this year. The ETF charges 29 bps in fees per year from investors while volume is light.
Holding 57 securities in its basket, the product puts about 40% of its assets in the top 10 holdings. The ETF is skewed toward financials, as it takes roughly one-fourth of the total assets, while healthcare, consumer staples and healthcare round out to the next three spots.
In terms of country allocations, United Kingdom is leading with 38.92% share, followed by Switzerland (21.29%), Germany (14.98%) and France (12.44%). The fund added nearly 17% so far this year (read: UK ETFs in Focus on Positive Outlook).
iShares MSCI EMU Index Fund (EZU - ETF report)
This is one of the most popular and liquid ETFs in the European space as indicated by AUM of nearly $6.9 billion and average daily volume of more than 3.3 million shares a day. The ETF tracks the MSCI EMU index, which measures the performance of the equity markets of the EMU member countries (those European Union members that use the Euro as its currency).
The fund holds about 244 securities in its basket, which is pretty spread across each security, as no single firm holds more than 3.3% of the assets. Country weights for the top three are France (30.68%), Germany (30.18%) and Spain (10.68%) (read: Time for This Top Ranked German ETF?).
From a sector look, the product is a bit tilted toward financials at 22.29% while industrials, consumer discretionary and consumer staples make a nice mix in the portfolio. EZU charges 0.49% in expenses and is up over 21% so far this year.
Given the current trends and increasing confidence in the Euro zone, Europe might be due for a strong bounce and a broad play on the region may be a good idea. This is especially true if investors take a closer look at a few of the top ranked ETFs in the space for excellent exposure and some more outperformance in the coming months.
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