Europe ETFs: Investing as Politics Roils the Continent

While the U.S. is now the global stock market leader, it's easy to forget that not so long ago Japan held the title of world's biggest. 

That was before it was devastated. How bad has it been for a country whose market once dwarfed that of the US? The iShares MSCI Japan Index Fund ETF (EWJ) traded around $66 last week. As devilish a figure as that is, it gets worse. That’s around where EWJ traded in June of another year…1994! 30 years of nothing.

And as for emerging market equities, the iShares MSCI Emerging Market Index Fund ETF (EEM) is trading around where it did at this time in 2007. So for non-U.S. stocks, while there have been strong performance periods, each one is later met with a selloff that just gets it back to even.

Not to be outdone, the average U.S. stock among the 1,000 largest, as captured by the Invesco Russell 1000 Equal Weight Portfolio ETF (EQAL) is working on a three-year period of near-zero returns. It has been FAANG and friends, with a dose of strong returns from some supporting players. But far from a globally inclusive market.

Europe: Old World, New Opportunities?

As Yogi Berra said, predictions are difficult, especially about the future. But past performance is also not a reliable indicator of what will happen going forward, despite the heavy dose of marketing material devoted to touting how a money manager did before a prospect became a client. 

Partly due to a recent news flow changing the dynamic across the Atlantic, and partly due to a dearth of “slam-dunk” alternatives, let’s consider the potential upside from investing in the stock markets of Europe.  

France, Germany and Italy are all in political turmoil, and that's enough to look for contrarian situations. It was not too long ago that China’s stock market was considered not investible by some prominent Wall Street voices. China’s market promptly “popped” 50% from early February to mid-May.  

So, with all this motion occurring in global stock markets, where does Europe fit in? While there are many Europe-centric equity ETFs, one that might give us a clue is a fund that takes a similar approach to many popular U.S. ETFs. It takes the top stocks by market capitalization, weights them as such, and thus captures the “big guys” of Europe. That’s the case with the $3.9 billion SPDR Euro Stoxx 50 ETF (FEZ), which debuted way back in 2002.  

FEZ: European Stocks by the Numbers

FEZ yields 2.5% and carries a weighted average portfolio price-earnings ratio of under 16x, both of which compare favorably to the S&P 500 index. Forecasted five-year earnings growth of 8% is competitive as well. This ETF has a tech weighting, but it's a modest 19% versus 34% for the S&P 500. Consumer cyclical, financials and industrial stocks combine with tech to account for more than 70% of FEZ.

Click chart for complete list. Source: etf.com

France was not always the geographical leader in this “top 50 stocks” ETF, but it is now, at about 40% of holdings. Germany adds another 26%, followed by the Netherlands, Italy and Spain at 16%, 8% and 7% respectively. Finland and Belgium round out the country mix for FEZ.

The other way to invest in Europe is to self-direct the country allocation. Nearly every developed country, as far down the economic size spectrum as Poland, Denmark, Norway, Sweden and Austria have single-country ETFs devoted to their stock markets. The etf.com search tool can help identify them for research efforts.

Europe has valuation going for it, and its leading stocks offer a decent balance of growth and stability. However, it has been a long time since non-U.S. stocks have ruled the world markets, and so investors need to drill down and make a convincing case to themselves to justify making the old-world part of their current portfolio allocation.