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Negative News Flow Puts Eurozone ETFs in Focus

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Eurozone has been going through a rough patch lately with the economy losing momentum. This is especially true as the series of data this month points to a slowdown after the fastest annual expansion in a decade.

Downbeat Data

Business activity has slowed down for the fourth consecutive month. This is best indicated by the broad gauge of economic activity for the 19-member bloc – the IHS Markit Composite Purchasing Managers’ Index (PMI) – that dropped to 54.1 in May from 55.1 in April. This represents the lowest reading in 18 months. Growth in Germany, Eurozone’s largest economy, slowed to a 20-month low while France - the #2 economy - witnessed the slowest growth in business activity in a year and a half.

Meanwhile, the composite output price index fell to an eight-month low of 53.0 in May from 53.4. Inflation unexpectedly fell to the lowest level in more than a year to 1.2% in April from 1.3% in March and moved further away from the European Central Bank’s (ECB) 2% target ceiling.
This would pose a major setback to ECB’s plans of winding down its bond-buying stimulus program. The central bank has already halved its massive €60 billion per month asset buying program from January and is expected to maintain the pace at least until September (read: Currency Hedged Euro Zone ETFs to Buy After ECB Meet).

Further, earlier in the month, Eurostat data showed that Eurozone growth slipped to 0.4% in the first quarter, down from 0.7% expansion in the final quarter of 2017. This represents the weakest growth rate since the middle of 2016.

Geopolitics

The Eurozone has also been caught up in Trump’s protectionist trade action and the geopolitical tension arising between the United States and China, which is likely to have an impact on global economic growth. Among the latest woes, the Trump administration might not extend the exemption for the European Union on steel and aluminum tariffs after Jun 1. The White House had proposed to cut European Union steel and aluminum exports to the United States by about 10%.

Additionally, the political instability in Italy with the incoming populist government has also stirred up trouble in the 19-member bloc. All these suggest that recovery in the Eurozone economy may take longer than expected.

Any Bright Spots?

Concerns over economic slowdown as well as political risk in Italy are weighing on the euro. The surge in dollar due to speculation for faster-than-expected rate hikes is also leading to deceleration in the currency. Notably, euro is hovering around a six-month low against the dollar and a nine-month low versus the yen.

A decline in euro will actually benefit exporters and the manufacturing industry, resulting in soaring stock prices. This is because Europe is primarily an export-oriented economy and a weaker currency makes its exports more competitive. It will also help in improving the regions’ trade balances.  

Further, unemployment in the 19-country area remained at 8.5% - the lowest level since December 2008.

ETFs to Watch

Given the prospect of monetary easing policies for some more months and a weakening euro, investing in a Eurozone ETFs could be a good idea. Below we have highlighted some that have a favorable Zacks ETF Rank #3 (Hold), suggesting room for upside (read: What European Slowdown? Here Are 4 ETFs Beating S&P 500).

iShares MSCI Eurozone ETF (EZU - Free Report)

This product provides exposure to developed market countries using the Euro for currency and by tracking the MSCI EMU index. It holds about 254 securities in its basket with none holding more than 3.1% share. The fund is widely spread across sectors with financials, industrials, and consumer discretionary taking a double-digit allocation each. From a country look, France and Germany take the biggest share in the basket with 33.4% and 29.3%, respectively. EZU is one of the most popular ETFs in the broader European space with AUM of $13.1 billion and average daily volume of more than 7.9 million shares. It charges investors 0.49% in annual fees and has gained 1.3% so far this year.

SPDR EURO STOXX 50 ETF (FEZ - Free Report)

This fund follows the EURO STOXX 50 Index, which measures the performance of some of the largest companies across the components of the 19 EURO STOXX Supersector Indexes. The fund appears rich with AUM of $4.1 billion and average daily volume of around 3.6 million shares. Expense ratio comes in at 0.29%. Holding 51 securities in its basket, the product is pretty well spread out across components with each firm accounting for less than 5.6% of the assets. However, it is slightly tilted toward the financial sector at 20.8% while industrials, consumer discretionary, healthcare and consumer staples round off the top five. In terms of country allocation, France and Germany are leading with 37.7% and 32.6% share, respectively, followed by the Netherlands (10.6%), Spain (9.5%), and Italy (4.9%). The fund is up 1% in the year-to-date timeframe.

iShares Currency Hedged MSCI Eurozone ETF (HEZU - Free Report)

For investors looking to manage currency risk while remaining invested in the Euro zone stocks, HEZU might be a good option. The fund follows the MSCI EMU 100% USD Hedged Index and is a play on the popular unhedged fund (EZU - Free Report) with a hedge to strip out the euro currency exposure. It has amassed $1.9 billion in its asset base and trades in solid volumes of 1 million shares a day. The fund charges 52 bps in annual fees from investors and has gained about 4.9% so far this year (read: Currency Hedged ETFs Gaining Love on Rising Dollar).

SPDR STOXX Europe 50 ETF (FEU - Free Report)

This ETF has amassed $232.5 million in its asset base and trades in volumes of 69,000 shares per day. It charges 29 bps in annual fees and holds 50 stocks in its basket. While the fund tracks the same index as of FEZ, it is slightly different in terms of sector and country holdings. Here, financials, consumer staples and healthcare take the top two spots in terms of sectors. Country weights for the top three are 34.3% for the United Kingdom, 17.8% for France and 17% for Switzerland. The product has lost 1.1% so far this year.

First Trust Eurozone AlphaDEX ETF (FEUZ - Free Report)

This fund follows the Nasdaq AlphaDEX Eurozone Index and employs the AlphaDEX stock selection methodology to select stocks from the NASDAQ Eurozone Index. Holding 151 stocks in its basket, the fund is well spread out across components with none holding more than 1.44% of the assets. Here also, France and Germany take the top two spots in terms of country exposure. The product has accumulated $79.7 million in its asset base while trading in volume of 17,000 shares a day on average. It charges 80 bps in expense ratio and has gained 2% so far this year (see: all the European ETFs here).

Xtrackers Eurozone Equity ETF (EURZ - Free Report)

This ETF is an unpopular and illiquid choice in the Eurozone space with AUM of just $2.5 million and average daily volume of 2,000 shares. It tracks the NASDAQ Eurozone Large Mid Cap Index and holds 337 stocks with each accounting for less than 3.2% share. Financials, industrials and consumer discretionary are the top three sectors with double-digit exposure each. EURZ has an expense ratio of 0.09% and is up 2% in the year-to-date timeframe.

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