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ETF News And Commentary

Draghi did it again! Two years back, his magic words “ECB is ready to do whatever it takes” assured jittery investors that the euro-zone was not going to collapse.

This time “We aren’t finished yet” was aimed at fighting deflationary threats and boosting growth. Annual CPI for the euro-zone is running close 0.5%, much below ECB’s target of 2.0%.

Further barring Germany, growth in most of the economies in the euro-zone remains stagnant. With the economic recovery so fragile, the threat of deflation was real. (Read:
Beat the market with fundamentally strong ETFs)

Among the measures announced 1) key refinancing rate lowered to another historic low 0.15% from 0.25% and 2) deposit rate paid by ECB to banks for parking funds with it overnight lowered into negative territory at -0.1%.

In fact, ECB is the first major central bank to resort to negative interest rate in order to force banks to lend more to credit-starved businesses. (Read: Dividend ETFs explained—What investors need to know)

ECB also announced other measures to lend money at ultra-low rates. These actions together are in effect a significant monetary stimulus for the euro-zone’s economy. Further they also laid the groundwork for a possible asset purchase program in near future.

With the Fed tapering its QE and the ECB continuing on its easing path and possibly starting a QE sometime in the coming months, money is likely to continue to flow into European equities, a trend seen in the last few months. (Read: 3 Excellent Value ETFs poised to outperform)

Further, after the bull run of more than five years, valuations of most US stocks look somewhat stretched. On the other hand, European stocks began to recover only last year after many years of pessimism and are still significantly below their pre-crisis high and have some way to go.  

Below we have highlighted three Zacks Rank # 2 (Buy) ETFs that provide exposure to a broad basket of European equities. (See all European Equity ETFs here)

Vanguard FTSE Europe ETF (VGK - ETF report)

VGK is the most popular and the cheapest fund in the space, with AUM of almost $18 billion and expense ratio of just 12 basis points.

It holds 515 stocks spread across developed European countries. Top 10 holdings account for 19.3% of the assets. Royal Dutch, Nestle and Roche are among the top holdings.

UK, France, Germany and Switzerland take the top exposure in terms of countries.

iShares MSCI EMU Index Fund (EZU - ETF report)

EZU provides exposure to the EMU member countries by tracking the MSCI EMU index. It is one of the most popular ETFs in the space with AUM of about $12 billion. It charges investors 0.48% in expenses and pays out a yield of 2.1%

The fund holds about 247 securities in its portfolio, and is well diversified across its holdings, as no single holding accounts for more than 3.5% of the assets. The product is heavy on financials exposure at 23%, followed by industrials and consumer discretionary.

France and Germany take the top allocations with 32% and 29% share of the asset base followed by Spain,

SPDR EURO STOXX 50 ETF (FEZ - ETF report)

FEZ tracks the EURO STOXX 50 Index, which measures the performance of some of the largest companies in the eurozone. The fund is quite popular with of AUM of $5.9 billion, and average daily volume of about 400,000 shares,

It holds 57 securities in its portfolio with about 39% of its assets in the top 10 holdings. The ETF is heavy on financials, with 27% of the total assets, while industrials also get double-digit allocation.

In terms of country allocations, France and Germany take the top spots with 36% and 32% share, respectively, followed by Spain (13%). The fund charges an expense ratio of  0.29% and pays out an attractive yield of 2.61%.

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