Markets

European ETFs Plunge As Trouble Hits Region's Core

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Investors in Europe are bolting for the exits.

Even as global markets shook in recent weeks, European stocks were hit far harder. The $11 billionVanguard FTSE Europe ( VGK ), the largest ETF tracking European equities, tumbled 9% in the past month vs. SPDR S&P 500's ( SPY ) 6% loss.

Fears swirl around German industrial output. France and Italy face budgetary woes. Greece teeters on political instability. And critically, the euro fell sharply against the U.S. dollar in the third quarter to a two-year low, before rallying a bit the past two weeks. Its slide has eroded the returns of funds investing in Europe.

The situation now contrasts with 2012, when minor countries on Europe's periphery were struggling, said Robert Leahy, CEO of Leahy Wealth Management, which manages $31 million in assets.

"The powerhouses of Europe are in trouble right now, that's the big difference," Leahy said. "If Germany flips fully into recession, there will be problems throughout the continent."

Fears of an economic slump were triggered over the summer, when second-quarter GDP figures showed contraction in Germany and Italy, and stagnation in France.

"That shocked everybody," Leahy said. To make matters worse, the European Central Bank that is trying to prop up these economies lacks the leverage of its American counterpart, he added.

VGK is now 15% below its old high of 61.89. It fell through its 200-day moving average line on July 30 for the first time in more than a year. Its 50-day has now dipped below the 200-day, a bearish signal.

Growing Pains

VGK's peers such as iShares S&P Europe 350 ( IEV ) and SPDR Dow Jones Euro Stoxx 50 ( FEZ ) have traced similar moves.

A core fund for international exposure, VGK holds 520 large- and midcap stocks in 17 developed European markets. It allocates 33% to the U.K., 15% to France and 13% to Germany. Top holdings includeNovartis ( NVS ) andRoche (RHHVF).

It has lost 9% year to date, as has IEV; FEZ is down 11%. Those losses were outpaced by iSharesMSCI Germany's (EWG) 16% plunge.

In a relative sense, currency-hedged European ETFs performed better.WisdomTree Europe Hedged Equity (HEDJ) andDeutsche X-Trackers MSCI Europe Hedged Equity (DBEU) lost 3% and 4% respectively so far this year.

For U.S. investors, hedged ETFs mitigate currency risk and give a "purer return" approximating the return of the local market, Dodd Kittsley, head of ETF strategy for Deutsche Asset & Wealth Management, wrote in a report last month.

"They remain an underutilized risk-management tool, particularly in today's environment when many investors are expecting a stronger U.S. dollar," he said. Of course, these hedged ETFs will lose out on any further rally in the euro. So far it's rallied 2% from its Oct. 3 low.

But given market conditions, Leahy does not advise direct European exposure to his clients. Still, he noted indirect exposure is inevitable when owning American companies.

An ETF he likes isMarket Vectors Morningstar Wide Moat (MOAT). Its top 10 holdings, he notes, includeGeneral Electric (GE) and other U.S. heavyweights with global exposure, especially to Europe.

"We continue to underweight Europe and overweight U.S. large-cap companies," Leahy said. Small- and midcap stocks are starting to struggle as they typically do when the stock market enters the final innings of its recovery, he added.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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