Equity: Developed Europe - Large Cap
The developed market European large-cap funds are drastically different from each other in every measure. They all define the market differently, resulting in very different portfolios. At
“The European large-cap funds are drastically different from each other ” one end of the spectrum is IEV, a comprehensive portfolio of close to 350 of the largest companies from 17 European countries. At the other end are two funds that track the same index: FEZ and ESTX. FEZ and ESTX each hold 50 of the biggest European companies, but only from the Eurozone, so Switzerland adn the UK are excluded. FEU also holds just 50 names, but leans more toward mega-caps and isn’t restricted to the Eurozone.
As a result, the portfolios look different. FEU and IEV make large allocations to the UK, while FEZ and ESTX exclude it altogether, and instead allocate more than two-thirds to France and Germany. FEU tilts much larger than any of its competitors. It particularly overweights Swiss firms and the healthcare sector. IEV hews close to our neutral benchmark in all respects.
The differences aren't limited to Fit. FEZ and IEV are far more liquid than FEU, with multiple millions of dollars changing hands daily, while ESTX sees anemic trading at best. From an all-in cost perspective, FEZ is the clear winner, since IEV charges more than twice the expense ratio of the other two ETFs.
Ultimately, IEV earns our Analyst Pick because it offers broad, diversified access to developed European companies in an efficient, liquid package. FEZ earns our Opportunity list designation because its focus on countries using the euro could appeal to discerning investors that wish to hedge or embrace exposure to the currency. (Insight updated 06/27/17)
ETF.com Efficiency Insight
The biggest differentiator in Efficiency is cost: IEV, with its 0.60% expense ratio, charges more than twice as much as its next-cheapest peers. These different expense ratios are reflected
“IEV, with its 0.60% expense ratio, charges twice as much as its peers.” in each fund's tracking prowess and score: FEZ and FEU are at the top, with IEV lagging behind them.
Newer launch ESTX lags significantly in Efficiency, largely due to its failure—so far—to attract much investor interest. We don’t yet have enough data to comment on its tracking, but its segment-low expense ratio of 0.16% certainly can’t hurt.
All three of the established ETFs actively lend out securities. FEU and FEZ both pass 100% of securities lending revenues through to shareholders, which can boost fund performance. In contrast, IEV passes through just 75%: A less impressive percentage, but still significant.
IEV and FEZ in particular are extremely stable and well established. FEU is much smaller than its two larger counterparts, but is unlikely to close anytime soon. ESTX potentially faces the chopping block if its asset base remains low.
All four funds have been tax efficient: None has distributed any capital gains and all have managed to shore up significant capital losses to continue avoiding forced payouts in the future. (Insight updated 06/27/17)
ETF.com Tradability Insight
IEV and FEZ lead the segment in Tradability, with millions of dollars changing hands on most days. Their on-screen liquidity is ideal for the largest trades. FEU also see significant
“IEV and FEZ lead the segment in Tradability.” liquidity, but it's not in the same league, so large trades should to be managed carefully to avoid moving the market. The last fund, ESTX, is a relatively new launch that has yet to see a robust secondary market develop. Carefully managed limit orders are necessary.
Bid/ask spreads are roughly what you’d expect from each fund’s daily volume. IEV and FEZ carry average spreads of just a penny, the narrowest possible. FEU sees wider but still very reasonable spreads, making limit orders a good idea for smaller investors. ESTX shows reasonable average quoted spreads, but its low liquidity implies a shallow order book that could easily be blown open by larger trades. Trade carefully.
Large trades may be executed more efficiently through market makers: all three established funds earn great block liquidity scores. ESTX is not yet scored in block liquidity, but using a liquidity provider may still be better than braving the market—especially if you’re buying or selling an entire creation unit as the fund’s underlying holdings are predominantly liquid. (Insight updated 06/27/17)
ETF.com Fit Insight
Four different European large-cap ETFs offer three very different portfolios. IEV looks the most like our neutral benchmark, with a broad portfolio of around 350 companies weighted by
“IEV looks the most like our neutral benchmark” market cap, but even IEV doesn't capture the market perfectly.
Of the other three funds, FEU is most market-like. It holds 50 large- and mega-caps, with at least some representation from each sector. FEZ and ESTX track the same index, which holds 50 firms from the Eurozone, weighted by market-cap.
In practical terms, the most glaring difference is in country exposure. FEU and IEV make heavy allocations to the United Kingdom and take significant stakes in Switzerland. In contrast, FEZ and ESTX completely exclude both countries, which are not part of the eurozone. Both funds also exclude Sweden. Together, these three countries account for about half of our neutral benchmark. To compensate, FEZ and ESTX heavily overweight France and Germany: approximately 2/3 of their portfolios are allocated to those two countries.
FEU, with its mega-cap portfolio of the 50 biggest European companies, dwarfs the size of the other ETFs, with a weighted average market cap of over $120 billion. IEV’s broad portfolio extends beyond large-caps to include an allocation to mid-caps. However, we don’t see much of a small tilt overall. FEZ and ESTX also see no significant size tilts.
Despite such different selection filters and country allocations, sector tilts are generally moderate among the four funds. FEU significantly overweights healthcare, but otherwise appears to be broadly representative.
Ultimately, the choice of the right European large-cap fund depends on which countries you consider to be “European” and how large you think large-caps should be. If you want the broadest, most representative portfolio of large-caps, IEV is it. If, instead, you only want the biggest 50 companies, you’ll be better off with one of the other three—FEU if you want to include all of Europe, FEZ or ESTX if you want to limit your exposure to the eurozone. (Insight updated 06/27/17)