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Can This High Yielding European ETF Surge Higher?

VGK EZU

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After relentless efforts by policymakers across the Atlantic, European markets are finally showing some sort of resilience. This has been especially true from the second half of last fiscal year after quite a forgettable 2011. From that time onwards, some of the debt plagued euro zone members were in the initial phase of stabilization primarily thanks to policy actions.

However, it has not been a smooth ride to say the least. Particularly when considering the numerous macro specific events within the euro zone which threatened to revive and renew the long dreaded euro zone fears.

The election outcome in Italy and other political developments from Spain, as well as the Cyprus drama, are some of the events which had caused massive panic in the European equity markets triggering big sell offs. Still, the risk taking has been pretty much intact as indicated by the surging equity markets across the continent (see Time to Buy the Hedged European ETF?).

Nevertheless, there has been one attribute which has been a pain for investors across both sides of the Atlantic—yields. The loose monetary policy to assist economic growth has also kept interest rates at depressed levels. This in turn has given way to increased appetite for higher yielding equities given the disproportionate risk-return tradeoff in bond investments.

In the light of the above statement, let us take a closer look at a European Equity ETF which has for long been an impressive performer and a decent source of yield. However, what strikes the most is the fact that its chart suggests that it may have the potential to surge further.

The following depicts the three year price chart of Vanguard FTSE Europe ETF (VGK - ETF report). This is a low cost product charging investors 12 basis points in expenses and providing yields in excess of 3% (also see 4 International ETFs Yielding more than 5%).

The ETF has seen compressed price action since the beginning of 2013 after quite an impressive 2012. Here, the $52 level represents a stiff resistance for VGK near which the ETF is currently trading. Nevertheless, since mid-2012, VGK has been on an uptrend as indicated by the upward rising support line.

This has caused an ascending triangle formation for the ETF. This is pretty much a bullish indication and we expect the ETF to make new highs from its current levels.

Also supportive of its decent upward momentum are its key trend lines. The ETF is currently trading above its 50, 100 and 200 SMA lines, so it is showing promise on that front as well.

However, the MACD chart could be in danger of topping out and falling back to earth. This means that investors may want to take caution before initiating a long position at the current level as this important technical is uncertain right now (also see Three European ETFs Beyond the Eurozone).

Also, it is prudent for investors to wait out and confirm a clear cut breakout of the stiff $52 resistance line before jumping into this ETF. And given a possible breakout of the resistance, even a level slightly above the 52 week highs would imply a good buying opportunity. This is especially true considering current liquidity and the European Central Bank’s willingness to slash interest rates further if required.

Thanks to these factors, events in Europe look to be in the ‘middle through’ scenario for quite some time so equities should hold up rather well in the near term. This could potentially make VGK, and similar European ETFs, solid choices in the near term, so long as their momentum can carry them higher in the short run.

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