Equity: Developed Europe - Total Market
The Developed Europe - Total Market segment expanded massively due to a slew of launches in 2014 and 2015. Currency hedging has been a major theme among the new funds, forcing investors to
“Currency hedging has been a major theme” select both their currency exposure and their geographic definition of Europe, among many other considerations.
A few funds stand out and serve to highlight key distinctions within the segment. Vanguard’s VGK wins Analyst Pick for broad coverage, low fees and excellent liquidity. IEUR also provides excellent exposure for a low fee, and has gathered a very strong following since its 2014 launch, even if it can’t match VGK’s liquidity. iShares’ EZU also trades extremely well, but limits its holdings to companies from eurozone countries. That means it excludes stocks from the UK, Switzerland and Sweden like Royal Dutch Shell, Nestle and HSBC.
The definitional difference of eurozone vs Europe carries over to nonvanilla funds. New fund HEZU offers straightforward, euro-hedged exposure to EZU, while DBEU, launched in 2013, hedges its currency exposures against currencies across developed Europe, not just the eurozone. WisdomTree’s blockbuster HEDJ goes beyond currency hedging. It limits its portfolio to dividend-paying eurozone companies that derive the majority of their revenues from exports outside the eurozone and hedges against the euro. Both EZU and HEDJ earn a spot on our Opportunities list for interesting takes on the space in an ownable, tradable wrapper. HEDJ also stands out for truly phenomenal investor inflows in 2015, and likely drove many issuers to bring additional ETFs to market.
While the new slew of funds brings more exposure choices, many lack the AUM and liquidity of their more established counterparts: SBEU, STXX and FEUZ are examples of newer funds with tiny AUM and poor liquidity. Fees vary widely too, and investors lack the benefit of a tracking record for the newer funds. (Insight updated 12/13/17)
All Funds (35)
IEUR $2.69 B 2691117000 low fee; solid AUM
VGK $18.18 B 18175748157.6 Large & liquid
EZU $15.47 B 15473427060 Eurozone only
EUMV $35.41 M 35411040 weak asset uptake so far
DBEU $2.28 B 2278228778.675 Currency-hedged
DBEZ $57.07 M 57074380.851 Currency-hedged
HEDJ $7.96 B 7959126560 popular non-vanilla
FEP $686.83 M 686834440.8933 decent assets
EUDG $54.06 M 54056040 New launch, high yield
DDEZ $15.79 M 15791900 N/A
JPEU $79.14 M 79144000 N/A
EDOM $12.25 M 12245840 Bets on homegrown growth
FEUZ $36.53 M 36531351.95592 trades poorly
HEZU $1.83 B 1832976000 strengthening assets
EURZ $2.41 M 2412924.129 Developed Southern Europe with FX hedge
DEZU $2.92 M 2923080 N/A
FLEE $5.0 M 4998000 N/A
GSEU $49.87 M 49872000 N/A
HEUV $3.73 M 3734295 N/A
FLEH $4.94 M 4944000 N/A
OEUR $51.84 M 51843270 new - trade with care
JPEH $30.4 M 30397500 N/A
RFEU $121.78 M 121775536.18464 N/A
HFXE $163.59 M 163586820.072 50% currency hedge
PTEU $83.77 M 83765000 N/A
EUDV $7.22 M 7217000 consistent dividend growth focus
SCID $9.97 M 9969058.807083 competes with SBEU
FXEU $7.26 M 7262424.208 currency hedged low volatility
OEUH $17.7 M 17695925 new - trade with care
DBSE $3.57 M 3574223.828 Developed Southern Europe with FX hedge
HGEU $5.12 M 5121250 vanilla currency hedged
EZR $2.47 M 2468508.7364 Bets on homegrown growth
PAEU $2.68 M 2675000 N/A
SBEU $1.11 M 1109000 new - trade with care
STXX $5.86 M 5860585 Full replication
ETF.com Grade as 12/07/17
Equity: Developed Europe - Total Market
ETF.com Efficiency Insight
The number of ETFs in the Developed Europe Total Market segment has more than quadrupled since the start of 2014. While more choice is a good thing, investors are confronted with a lack of
“HEDJ has attracted huge asset base since its strategy change in 2012” tracking history and a varied mix of asset-gathering success. Tracking history matters greatly because fees and actual holding costs as measured by tracking don’t always align. AUM matters too as a predictor of viability and to a lesser extent, liquidity.
The older funds in the segment generally enjoy first-mover status with respect to AUM. VGK stands out as a winner with an extremely low fee, a huge asset base and 10+ years of history. EZU boasts an even longer track record and also has billions of dollars in AUM, but charges about 4x more. Still, EZU typically costs far less to hold than its high fee implies, as shown by its lower median tracking difference. HEDJ, launched in 2009, was a relatively unpopular fund that switched gears in August 2012 to focus on Europe, accumulating a huge asset base since its strategy change. DBEU has also attracted strong investor interest in a short time, also without the aid of a bargain-basement fee.
Among the 7 funds launched in 2014, IEUR and HEZU stand out for assets and tracking—good tracking aided by a low fee for IEUR, and bad tracking with a caveat for HEZU. The caveat: HEZU holds an ETF (EZU) that trades in New York rather than a basket of stocks that trade in Europe, so it’s out of sync with its index from a tracking perspective. This doesn’t harm investors, but it does make true holding costs hard to determine. The remaining 5 funds in the class of 2014 have nowhere near the asset levels of IEUR and HEZU. Among these, we currently see closure risk for 4 of the 5—STXX, FEUZ, EUMV and EUDG—and the 5th fund, DBEZ, has only modest AUM. Low fees don't guarantee success: STXX and EUMV are cheap, but struggle to attract investor interest right alongside high-priced FEUZ.
Among the many funds launched so far in 2015, FXEU has gained traction with investors, while SBEU and SCID still have extremely low asset totals. Fees vary greatly here too, and while holding costs generally correlate with fees, choosing one fund over another based on a 5 bp fee difference is often a lousy way to pick an ETF.
In all, investors should consider starting their fund selection process with Efficiency, perhaps setting minimum bounds for track record length and/or AUM and keeping large fee differences in mind as well. (Insight updated 12/13/17)
ETF.com Tradability Insight
Investor interest in Europe—especially in currency-hedged takes on Europe—has helped liquidity for some funds and driven issuers to launch a raft of new ETFs, some of which
“VGK, EZU and HEDJ stand out in the segment for outstanding trading volume” trade poorly.
VGK, EZU and HEDJ stand out in the segment for outstanding trading volume and tight spreads. Traders of all sizes and stripes can benefit from their strong liquidity.
While trading at lower volumes, DBEU and HEZU offer ample liquidity too and very tight spreads
IEUR and FEP are a significant step down in trading volume and especially in wider spreads, but can still be accessed fairly by investors who trade with limit orders (always a good idea). Trading early in the New York day when underlying markets are open is also advisable since iNAV is more accurate and spreads should be tighter.
The remaining funds should be traded with considerable care; in some cases, simply because the funds are still relatively new. Still, thin volume is thin volume, whatever the reason. Limit orders are mandatory for the funds with low volume. Recall too that spreads are derived from the average inside spread and give no indication of depth of book. Be wary of a fund with a respectable 15 bp average spread but anemic $100K median volume. (Insight updated 12/13/17)
ETF.com Fit Insight
Investors must make 2 immediate decisions regarding the kind of developed Europe portfolio they want. The first is whether to define developed Europe as a landmass or as a currency bloc;
“HEDJ adds a screen for exporters and dividends to its hedged eurozone exposure” the second is whether to hedge their currency exposure.
Funds that define Europe as a landmass have exposure to the UK, Switzerland and Sweden. The distinction is huge: these 3 countries make up roughly half of the exposure of funds like VGK and IEUR, but are excluded from eurozone-only ETFs like HEDJ and EZU. Eurozone-only ETFs instead typically load up on Germany and France to fill the basket.
Currency-hedged offerings take advantage of current incredibly low interest rates in Europe and marginally higher rates in the US, making the hedge very low cost or even a slight net gain for the fund. The FX overlay will outperform the unhedged approach when local currencies fall against the dollar, and vice versa. HEDJ and HEZU, among others, offer currency-hedged exposure to the eurozone, while DBEU and others includes the UK, Switzerland and Sweden, and hedge out direct pound, franc and krona exposure.
Investors face additional decisions on exposure too. One approach is to opt for “vanilla” coverage within the context of the geographic and currency-hedging decision points above, or alternative exposures.
Vanilla exposure means market-cap selected and weighted. VGK, IEUR and STXX offer excellent vanilla exposure to broader Europe with no currency hedge; EZU for eurozone unhedged; DBEU and HGEU for hedged broad Europe; and DBEZ and HEZU for eurozone hedged.
Alternatively, HEDJ adds a screen for exporters and dividends to its hedged eurozone exposure; HFXE offers a 50% hedge; OEUH uses a quality and dividend approach, etc. When considering these alternative approaches, bear in mind the geographic and currency-hedge aspects too, if only as a frame of reference for what the “alternative” part of the exposure brings to the table.
Note that our benchmark is unhedged and includes the UK, Switzerland and Sweden, so the scores of many funds will suffer from their basic hedged and/or eurozone-only thesis.
Note too that the length of performance histories vary widely here—EZU has more than a decade under its belt, while roughly half of the segment’s funds launched in 2014 or 2015. Recall also that prior to 2012, HEDJ tracked a completely different index. (Insight updated 12/13/17)