After being stressed for a couple of years by sovereign debt
issues, high unemployment and stagnant growth, the European economy
is now on the verge of recovery. The economy consisting of 27
countries is improving slowly and is expected to grow 1.4% in 2014,
according to the European Commission.
The Euro zone (comprising 17 countries) economy finally emerged
from its six-quarter long recession with a 0.3% growth recorded for
the second quarter of 2013.(read:
Avoid These 3 Eurozone ETFs This Summer
). This is especially true given some surprising key growth
indicators. Let us have a look at the indicators in detail below:
Increasing Business Activity
Markit's PMI index for the Euro zone rose to 50.5 in July, well
above 48.7 last month and above the neutral 50.0 mark (signals
expansion) for the first time since January 2012. Manufacturing
production rose at the fastest pace since June 2011, as the sector
registered output growth for the first time in 17 months.
The brighter outlook comes from stabilizing domestic markets with
improvements in the manufacturing and service sectors. Business
activity in Europe's largest economy, Germany, rebounded in July
and would aid the entire Euro zone. (read:
Time to Get on the German ETF Bandwagon?
Rising Consumer Confidence
Consumer confidence in the region rose to the highest level in
almost two years to -17.4 in July. The number is well above the
-18.8 in June and market expectation of -18.30. Among the five
largest economies, Italy has enjoyed the highest consumer
confidence while the Netherlands experienced weakening sentiments.
Meanwhile, the euro has also shown some strength against the dollar
in the past weeks. In fact, the second-most traded currency in the
world has been able to hold above the 1.30 mark against the dollar.
This means that the euro is still up more than 2% against the
greenback when looking at the past one-month period, suggesting
that overall worries have been declining in Europe (read:
Bet on the Euro with These 3 ETFs
Unemployment across the Euro zone remained stable at 12.1% in June
but jobless claim fell for the first time in more than two years,
signaling some optimism in the region. In fact, Greece and Spain
still have a higher unemployment rate of 26.9% and 26.3%,
respectively, followed by Portugal at 17.4% and Cyprus at 17.3%.
However, many other regions such as Austria, Germany, the
Netherlands, Finland and Belgium have unemployment rates under 10%,
indicating a good sign.
Falling Interest Rates
in some of the troubled economies have fallen to a large extent.
For example, interest rates in Greece have fallen drastically from
25.82% a year ago to just 10.53% currently. Similarly, Spain and
Italy currently have rates of 4.67% and 4.42%, respectively.
ECB Measures Bearing Fruit
In order to avoid falling into a deeper recession, the European
Central Bank (ECB) in May had cut its benchmark interest rate by a
quarter percentage point to a record low of 0.50%. Additionally, it
is providing ample liquidity to the Euro zone banks when needed to
support the recession hit economy.
The U.K. is leading the way in European recovery with GDP growth of
0.6% in the second quarter, in line with the market expectation and
up from 0.3% in the first quarter. The expansion was broad based
with agriculture, services, production and construction all turning
to growth. This represents the first expansion in three years.
How to Play?
Based on these improving fundamentals along with the central bank's
dovish comments, European stocks and the related ETFs are seeing
huge fund inflows of late and are expected to get a boost in the
Further, the European equities look cheaper at current levels
compared to the U.S. and Japanese counterparts and reflect a good
entry point for investors (read:
3 European ETFs Holding Their Ground
For investors interested in the current recovery, we have
highlighted four funds, which offer targeted bets on the economy, a
strategy that can help investors profit if confidence in the bloc
continues to rise.
Vanguard FTSE Europe ETF (
This fund provides exposure to 17 European countries by tracking
the FTSE Developed Europe Index. This is by far the most popular
and liquid ETF in the European space, having amassed over $7.4
billion in AUM and trading in volumes of more than 2.25 million
The ETF primarily focuses on large caps with 84% of assets and
charges a fee of just 12 bps a year. The product is well spread out
across a large basket of 504 stocks as each security makes up for
less than 2.9% share.
In terms of sector exposure, financials take one-fifth of the
assets while consumer non-cyclical and healthcare together make up
for 27% share. The Britain firms dominate the portfolio with 33.8%
share, closely followed by double-digit allocations of 14.6% in
France, 14.4% in Switzerland and 13.5% in Germany.
VGK added over 5% in the past one month and currently has a Zacks
ETF Rank of 3 or 'Hold' rating.
SPDR EURO STOXX 50 ETF (
This fund follows EURO STOXX 50 Index, which measures the
performance of some of the largest companies across the components
of the 20 EURO STOXX Supersector Indexes. The fund appears rich
with AUM of over $2.8 billion, and average daily volume of nearly 1
million shares. The ETF charges 29 bps in fees per year from
Holding 55 securities in its basket, the product puts less than 39%
of its assets in the top 10 holdings. The ETF is skewed towards
financials, as it takes roughly one-fourth of the total assets,
while industrials, healthcare and consumer staples round to the
next three spots.
In terms of country allocations, France and Germany are leading
with 38.12% and 31.07% share, respectively, followed by Spain
(11.89%), Italy (7.51%), the Netherlands (7.38%), Belgium (3.24%)
and Ireland (0.72%) (read:
Is the France ETF in Trouble?
The fund returned over 7.5% in the trailing one month and has a
Zacks ETF Rank of 3 or 'Hold' rating.
iShares MSCI EMU Index Fund (
This ETF provides exposure to the EMU member countries (those
European Union members that use the Euro as its currency) by
tracking the MSCI EMU index. It is also one of the popular funds in
the space with AUM of nearly $3 billion while charging investors
0.50% in annual fees.
The fund holds about 245 securities in its basket which is pretty
spread across each security, as no single firm holds more than
3.53% of the assets. From a sector look, the product has a diverse
approach with financials, industrials, consumer discretionary and
consumer staples taking a double-digit allocation (read:
3 Top Ranked Financial ETFs to Buy Now
Country weights for the top three are France (31.69%), Germany
(29.47%) and the Netherlands (10.54%). EZU is a large cap centric
fund and is extremely liquid, trading in volumes of 2.3 million
shares per day.
The fund is up 7.6% over the last month and retains a Zacks ETF
Rank of 3 or 'Hold' rating.
iShares Europe ETF (
This fund provides broad exposure to European markets and is less
liquid relative to many other products in the space. It tracks the
S&P EUROPE 350 index and holds 354 securities in its basket.
The ETF has accumulated $1.5 million in total assets and charges 60
bps in fees per year.
The product is well diversified across individuals as none of the
securities make up more than 2.83% of total assets. Here again,
financials is the top sector with 21.18%, followed by consumer
staples (14.13%), healthcare (12.90%) and industrials (10.98%).
In terms of country exposure, the product allocates 32.97% to the
U.K. while Switzerland, France and Germany make up for at least 13%
share in the basket each (see more in the
The fund gained over 5% in the trailing past month and has a Zacks
ETF Rank of 3 or 'Hold' rating.
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ISHARS-EMU IDX (EZU): ETF Research Reports
SPDR-EU STX 50 (FEZ): ETF Research Reports
ISHARS-EURO (IEV): ETF Research Reports
VANGD-FTSE EUR (VGK): ETF Research Reports
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