Across the Pond: 5 ETFs for European Equity Exposure

Investors seeking geographic diversification might consider looking to Europe. Yes, the United Kingdom faces Brexit challenges and the eurozone has numerous geopolitical risks. And both areas face Covid-related risks. Nevertheless, two leading global experts and contributors to MoneyShow.com have favorable reviews for ETFs with overseas exposure. Gavin Graham, The Income Investor iShares MSCI United Kingdom ETF tracks the FTSE 100 Index of the largest companies in the U.K.; it has had a torrid time since we first recommended the fund nine months ago. The ETF initially rose to over US$34 as uncertainty that had dogged the British economy since the Brexit referendum in 2016 was dispelled. The share price then plummeted during the pandemic-triggered selloff in March and has not rebounded as much as the North American indexes. In part, this is due to the composition of the index, which has very little (5%) in technology and utilities, which were the best-performing sectors through the March selloff. Instead, the U.K. ETF had its largest weight in financials (17.9%), which were told by the U.K. government to suspend their dividends for this year to preserve capital. It has 30% in economically sensitive energy, industrials, and materials (10% in each sector). The U.K.'s open globally linked economy is also seen as being especially vulnerable to the rise of trade barriers and the inevitable additional difficulties of international travel and business after the pandemic fades. Given these negatives, it's unsurprising that the ETF is down 18% from last fall (down 15% including income). However, the U.K. does have some strengths. The top two holdings in the ETF are world-class pharmaceutical companies AstraZeneca at 8% and GlaxoSmithKline at 5.4% -- both of which are involved in developing therapies and vaccines to counter Covid-19. Pharmaceuticals and healthcare comprise 14.5% of the index. Meanwhile, defensive stalwarts like consumer staples, such as food and beverage and personal care, are the largest sector, making up 18.9%. Drinks giant Diageo (4.3%), British American Tobacco (4.1%), and personal care and food groups Reckitt Benckiser (RBGLY) (3.4%) and Unilever (3.3%) are amongst the top 10 holdings. The remaining members of the top 10 are energy with BP (4%) now remarkably larger than Shell (3.4%), HSBC (5%), and Rio Tinto in materials (3.7%). While the performance has been disappointing, and the forward yield probably closer to 2.5% as a consequence of the cuts and suspensions, the original reason for our recommendation remains. The U.K.'s largest companies get over 70% of their revenues from exports or overseas subsidiaries and are therefore not particularly exposed to the domestic U.K. economy. They are natural hedges against the weakness of sterling with foreign currency earnings and are world class global companies that just happen to be headquartered in the U.K. Finally, their underperformance since the Brexit referendum means that they sell at a major discount to the U.S. and European markets, even after the 50% reduction in dividends for 2020. The ETF remains a Buy for its low valuation, reasonable yield, and exposure to world-class companies, many of them in attractive post-Covid-19 sectors, such as healthcare and consumer staples. Should the world economy recover from the effects of coronavirus by 2021, the economically sensitive sectors in the U.K. index should benefit more than most. Jim Woods, The Deep Woods European markets have been slumping for years, but the time for those countries to shine again may finally be around the corner as potential investments and renewed growth in European economies is beginning to take off. SPDR Portfolio Europe ETF is about as close to a pure Western European investment vehicle as you can get, and it includes both large- and small-cap companies, though holdings are weighted by market cap. It is a simple idea aimed at investors who are looking to invest in the region broadly. Western Europe has underperformed American markets over that time period, just as European markets have for years. SPEU holds $137 million in net assets. Its expense ratio is a fair 0.09% and it pays a current 2.36% dividend yield. Its holdings cover a broad swath of industries; top holdings, by nation, are the United Kingdom, Switzerland, France, Germany and the Netherlands, though a number of other European countries are represented as well. The top five largest individual holdings are Nestle SA (NSRGY), 3.36%; Roche Holding AG (RHHBY), 2.50%; Novartis AG , 2.20%; ASML Holding NV , 1.66%; and SAP SE , 1.61%. The top 10 holdings make up 17.5% of SPEU's portfolio. ProShares MSCI Europe Dividend Growers ETF exists to track an index of European companies that have a history of stable dividend growth. To avoid excessive risk-taking as a result of having a limited amount of holdings, all of the assets in EUDV's portfolio are given equal weight. During times of market tumult, many investors choose to purchase shares in companies that have a history of stable dividend growth to secure reliable dividend payouts. If finding domestic companies with such a history is difficult, finding companies beyond the borders of the United States is even more so. Part of the problem is that many foreign companies that fit the bill are far from household names, at least in the United States. Thus, they may lack the reputation that a stable-dividend-paying American company may have. Some of this fund's top holdings include UCB SA (UCBJY); SEB SA; Ashtead Group plc (ASHTF); Partners Group Holding AG (PGPHF); Legal & General Group Plc; St. James's Place Plc (STJPF); and SSE plc (SSEZY). This fund's performance has risen after the recent market downslide. As of July 21, EUDV has been up 4.99% over the past month and 22% for the past three months. It was recently down 3.59% year to date. The fund has amassed $7.86 million in assets under management and has an expense ratio of 0.55%. It offered a current dividend yield of 1.59%. For investors interested in gaining exposure to stocks in the developed economies of Europe, the Vanguard FTSE Europe ETF may be a fund well worth considering. VGK holds a diverse and comprehensive portfolio of stocks from developed European countries. This fund is unique because, in October 2015, it shifted to a different version of its original FTSE index. The new version allows for the inclusion of smaller firms in market-like proportion, which may be appealing to investors if the quality of companies is up to par. VGK uses an indexing investment approach and invests all, or most, of its assets in the common stocks found in the FTSE Developed Europe All Cap index. In terms of European exchange-traded funds, VGK charges an incredibly low fee. With massive daily volume and tight spreads, it is one of the most liquid funds in its segment. This open-ended fund has an expense ratio of 0.08% and a dividend yield of 4.12%. According to Morningstar.com, VGK has sales growth of 0.59% and $11.74 billion in assets under management. Though the fund is down year to date (YTD), it has seen a steady growth of 17.08% in the last three months. VGK, like many other funds, both American and European, has been impacted by the coronavirus and absorbed the most damage in mid-March. However, this ETF has showed a steady upward trend, and, as of late, it has surpassed both its 50-day and 200-day moving averages and continues climbing. Though VGK is an incredibly diversified fund, the majority of its holdings are in the health care sector, which makes up 16.20% of its total portfolio. Its top five holdings and their weightings in the fund's portfolio are Nestle SA, 3.50%; Roche Holding AG Dividend Right Cert., 2.75%; Novartis AG, 2.07%; AstraZeneca PLC, 1.58% and ASML Holding NV, 1.46%. For investors looking to broaden their holdings to include European stocks in developed economies, Vanguard FTSE Europe ETF may be worth examining. Its representative portfolio, low expense ratio of less than 0.10% and strong liquidity make for a strong ETF. The WisdomTree Europe Hedged Equity Fund seeks to provide exposure to the European equity market while hedging against fluctuations between the U.S. dollar and the euro. The fund is hedged against the euro for U.S. investors. HEDJ targets dividend-paying firms, and, as the ticker implies, aims to remove euro currency exposure for the benefit of investors who are based in the United States. The WisdomTree currency-hedged equity funds use its currency-hedging strategies by entering one-month forward contracts each month and rebalancing at each month's end. In a weakening euro scenario, the hedge seeks to protect local gains from getting lost in the conversion back into U.S. dollars. In a strengthening euro environment, the fund is designed to safeguard against poor local returns and no foreign exchange gain. Effectively, HEDJ doubles down on its bet against the euro. The fund charges a hefty fee, but it has had no trouble attracting assets. Consequently, it is one of the most liquid ETFs in the developed European space, making it ideal for short-term tactical trading. Investors may want to consider trading in the morning (New York time), when European markets are still open, for the best price. HEDJ is heavily weighted in three countries; France, 32.35%; Germany, 30.10%; and the Netherlands, 18.75%. Its sectors are heavily weighted in five sectors: Consumer Non-Cyclicals, 22.16%; Consumer Cyclicals, 20.27%; Health Care, 15.58%; Industrials, 14.72%; and Basic Materials, 14.28%. The fund has $2 billion in assets under management, 103 holdings and an average 0.02% spread. It has a 1.52% distribution yield and an expense ratio of 0.58%, meaning that it is more expensive to hold in comparison to many other exchange-traded funds. To sum up, HEDJ tracks an index of Eurozone dividend-paying companies that derive a majority of revenue from exports outside that zone. This fund could be beneficial for short-term tactical traders, but please exercise your own due diligence in deciding whether or not this ETF is suitable for your individual investing and portfolio goals.

Across the Pond: 5 ETFs for European Equity Exposure

European markets have been slumping for years, but the time for those countries to shine again may finally be around the corner.

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