Europe ETFs have underperformed the S&P 500 (up 16.3%) this year as the iShares Currency Hedged MSCI Eurozone ETF (HEZU Quick QuoteHEZU - Free Report) has added 12.8%. Non-hedged version of the fund – iShares MSCI Eurozone ETF (EZU Quick QuoteEZU - Free Report) has added 10.8% in the year-to-date frame.

Inside Lackluster Eurozone GDP Growth

The Eurozone GDP expanded a slight 0.1% sequentially in June 2023, revised lower from initial estimates of a 0.3% gain. It followed a 0.1% growth in the previous quarter, revised higher from a flat reading. In Q2, Germany, which is the Eurozone largest economy stalled, France expanded 0.5% and Spain grew 0.4% while Italy contracted 0.4%.

However, apprehensions persist regarding the health of the bloc's economy, and skepticism is on the rise regarding its capacity to avoid a recession this year, particularly given the lackluster economic prospects for Germany.

ECB Policy

According to the minutes from the latest European Central Bank (ECB) meeting, while ECB policymakers initially indicated the possibility of a rate hike in September when they increased interest rates in July, some members now seem to imply that this action might become unnecessary once new projections are revealed.

Over the course of just over a year, the ECB has increased rates from -0.5% to 3.75% in order to combat a surge in inflation. However, arguments in favor of a pause are gaining traction, driven by the belief that the cumulative tightening's impact is potent enough to reduce underlying inflation.

The minutes also revealed that forthcoming decisions will be depending on data and will follow a meeting-by-meeting approach. Policymakers are striving to find a balance between addressing high inflation and slow economic growth.

Should You Tap Europe ETFs?

The economic growth environment is still downbeat.  However, investors should note that the interest rates in the Euro zone are still way lower than the United States. Plus, banking earnings in Europe have come in better-than-expected in the second quarter despite an emergence of global crisis in the first quarter (read: Should You Buy Europe Financial ETF EUFN on Earnings Strength?).

Moreover, Europe stocks and ETFs offer handsome dividend yields. High dividend ETFs can be a good investment during times of economic uncertainty, as they provide a steady source of income regardless of market conditions. These types of stocks and ETFs typically pay out a higher percentage of their profits as dividends than other stocks, which means that they can make up for the capital losses, if there is any.

ETFs in Focus

Against this backdrop, below we highlight a few high-dividend ETFs that yields higher than the benchmark U.S. treasury yield (4.27% as of Sep 7, 2023).

iShares Currency Hedged MSCI Eurozone ETF (HEZU Quick QuoteHEZU - Free Report) – Yield 19.54%

Xtrackers MSCI EAFE Hedged Equity ETF (DBEF Quick QuoteDBEF - Free Report) – Yield 17.61%

First Trust STOXX European Select Dividend Index Fund (FDD Quick QuoteFDD - Free Report) – Yield 6.76%

First Trust RiverFront Dynamic Europe ETF (RFEU Quick QuoteRFEU - Free Report) – Yield 5.27%