Although Europe is presently on a roller-coaster ride, the continent has lately come out of the crisis that hit several years ago. The lull then had been pretty widespread, but the epicenter of the turmoil was arguably in the Eurozone.
When the Eurozone returned to the growth path in Q2 by improving 0.3%, all eyes again shifted toward this vital market. Reduced debt worries and improved growth in some key members like Germany helped create this optimism.
To add to this, the recent cut in benchmark rate to a record low of 0.25% by the European Central Bank (ECB) to trigger growth and inflation signals that the authority will leave no stone unturned to boost activity in the region (see all the European ETFs here).
Notably, the ECB follows a directive to maintain inflation rates close to 2% which was far behind the 0.7% inflation rise in October.
Though the region is far from attaining sustainable growth, just the end of a long-run recession itself is great news. The big component of the region – Germany – walked on the growth path to start the year.
Although, in the third quarter, France dipped after peeping into the growth corner, sustained improvement in the country seems close at hand.
The Eurozone’s third largest economy – Italy – will likely log GDP growth in the final quarter of the year putting an end to its nine consecutive quarter long recessionary steak.
The Netherlands broke free from recession in Q3 scoring 0.1% quarter over quarter. The growth rate was in stark contrast to a sharp drop of 0.9% in the year-ago quarter.
Thus, given the region’s slow-but-improving fundamentals, a look at the top ranked ETF in Europe or rather some countries in the Eurozone could be a good idea, especially by using our Zacks ETF Ranking system.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (Read: Zacks ETF Rank Guide).
Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the European equities space, we have taken a closer look at the top ranked EZU. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ (see the full list of top ranked ETFs) and is detailed below:
EWZ in Focus
Launched in July 2000, iShares MSCI EMU ETF (EZU - ETF report) is a passively managed exchange traded fund (ETF) looking to deliver the return of the MSCI EMU Index before fees and expenses.
The fund is among the most popular in the Europe equities space with more than $7.0 billion in assets. With a huge trading volume of around 3,000,000 shares a day, the fund provides investors ample liquidity.
The choice is also a cheaper one as it charges 49 basis points in fees a year which is quite below the average expense ratio in the Europe equities space. In fact, higher trading volume led to relatively lower expenses.
With 244 stocks in its basket, this fund from iShares puts only 25.0% of its total assets in the top 10 holdings with no company accounting for more 3.31% of the total, suggesting low concentration risk. Top companies include Total SA, Sanofi and Bayer AG, all of which account for around 9% of the assets.
In terms of sector exposure, the top allocation, financials, comprise a little greater than one-fifth of the total assets followed by industrial companies making up around 14%.
Beyond this, consumer discretionary (12.7%) and consumer staples (10.6%) round out the top four. Information technology (5.18%) gets the least weight (read: Forget Europe's Currency Risks with These Hedged ETFs).
Style-wise, the fund has a value tilt with 56% exposure, keeping the fund away from excessive volatility. As much as 88% focus on large caps also calls for somewhat lower volatility.
Although it seeks to provide international diversification for U.S investors, it is prudent to note that it has a strong correlation with the S&P 500 Index as indicated by an R-squared of 78% against the S&P 500.
The fund has returned around 19.4% in the year-to-date frame ending November 22, 2013 which surpassed the biggest European fund by assets Vanguard FTSE Europe ETF’s (VGK - ETF report) 16.6% return.
EZU has returned an impressive 28.8% roughly in the last one-year period ended September 30, 2013. The fund is currently hovering near its 52-week high level. EZU pays out a yield of 2.20% per annum.
This ETF is appropriate for investors looking for a targeted bet on European stocks with a focus on maximizing total income in the form of dividends as well as capital appreciation.
Though we expect a rough road to recovery as evident from slowing Euro-area growth of just 0.1% in Q3 as opposed to 0.3% in Q2, the region has surely come out of the meltdown.
Thus, investors having a steady appetite for risk can consider buying the product on the recent dip. Just remember, the fund is unhedged, making it vulnerable to any weakness in the Euro.
We don’t expect this to create too much of a concern in the near term though, given the current market scenario, suggesting that this could be a solid pick for those seeking broad Europe exposure at this time.
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