Choosing The Best Europe ETF

November 20, 2013

Playing Europe’s recovery is a great idea, but the devil's in the details.

Of all the big headline stories in 2013, the European rebound is one of the less-talked-about stories that has, to some extent, flown under the radar.

Just over a year ago, the euro sold off close to 1.20/dollar as fears lingered about a systemic breakdown in the eurozone and its currency. But since then, the euro has rebounded back above 1.35/dollar.

In fact, the euro is one of the top-performing currencies against the dollar in 2013, gaining more than 2.3 percent—this gain comes even after the European Central Bank’s most recent surprise of a 25 basis-point interest rate cut, which dropped short-term borrowing costs to 0.25 percent.

European stocks have also seen a turnaround. While Europe-focused ETFs have shown impressive returns, fund flows have been even more impressive, suggesting a resurgence in investor confidence in the Europe.

Here’s a table of flows for some of the largest and most liquid broad Europe ETFs, including two currency-hedged ETFs.

Ticker 2013 Flows ($M) AUM ($M) % of AUM (since 1/1/2013)
VGK 6,200 12,569 49%
EZU 3,881 6,847 57%
FEZ 2,610 4,449 59%
IEV 933 2,414 39%
FEP 237 288 100%
FEU 88 145 61%
ADRU 1 17 6%
DBEU 3 8 38%
HEDJ 429 509 84%
As of 11/18/13

If you're bullish on Europe at the moment and considering Europe ETFs, there are two key factors that need to be tackled.

The first is whether you want Europe or eurozone exposure. The second is whether or not you want currency-hedged exposure.

Like so many segments of the market, not all Europe-focused ETFs are equal.

Europe Vs. Eurozone

Interestingly, the most popular Europe ETFs seem to be pretty evenly split down the middle between Europe and eurozone exposure. For example, the $12.6 billion Vanguard FTSE Europe ETF (VGK | A-95) casts a wide net, capturing all developed European countries.

Meanwhile, the $6.8 billion iShares MSCI EMU ETF (EZU | A-57) specifically targets only European Monetary Union (EMU) member countries. This means EZU excludes the U.K., Switzerland and Sweden. That’s significant, as these three countries combined make up more than 50 percent of Europe’s total market cap.

Moving down the list, the $4.4 billion SPDR Euro Stoxx 50 (FEZ | C-59) is another eurozone-only fund, holding 50 of the largest companies from the EMU. Then we have the $2.4 billion iShares S&P Europe 350 ETF (IEV | C-96), which, like VGK, includes all developed European countries, but targets 350 of the largest companies.


Currency-Hedged Or Not?

The largest broad Europe-focused currency-hedged ETF is currently the $508.7 million WisdomTree Europe Hedged Equity Fund (HEDJ | D-39). That said, HEDJ only targets eurozone nations and neutralizes its exposure to the euro through shorting currency futures and forward contracts.

But perhaps the real twist with HEDJ is that it heavily tilts toward exporters by screening out any companies that don’t get more than 50 percent of their revenues from outside Europe. So this is a fund that benefits from the eurozone’s exporting prowess, rather than domestic demand.

If you prefer currency-hedged exposure to all of Europe as opposed to the eurozone, the db X-trackers MSCI Europe Hedged Equity Fund (DBEU) is the best available option. Still, the fund is still fairly new, has only $7.9 million in assets and trades $36,000 worth of shares a day, so that’s something to consider when placing trades in DBEU.

Tying It All Together

Here at IndexUniverse, VGK gets our “Analyst Pick” nod for the European market. The fund offers the most representative beta exposure to Europe at a reasonable cost—it costs only 12 basis points ($12 for each $10,000 invested); trades more than $230 million a day; and follows a straight, cap-weighted selection and weighting scheme.

From a currency-exposure perspective, VGK goes beyond eurozone nations, so it also has exposure to the pound sterling, Swiss franc, Swedish krone and Danish krone.

This compares with EZU, which also has fantastic liquidity, but charges 53 basis points. While EZU is a good, albeit costly, choice for those wanting only eurozone exposure, be mindful that it completely misses out on some of Europe’s largest non-EMU companies, such as Nestle, HSBC Holdings, Roche, Novartis, BP, Vodafone and GlaxoSmithKline.

While currency-hedged exposure has been the rage during the past year due to the popularity of the $11.1 billion WisdomTree Japan Hedged Equity Fund (DXJ | B-45), in Europe, currency-hedged products have actually lagged behind their nonhedged peers due to the rise in the euro.

While the dollar has been in favor in recent months due to Fed tapering fears, it seems with regard to Europe that there’s been a relief rally in the euro from the easing of fears from any systemic breakdown in the euro currency.

Looking at fund returns year-to-date, it’s no coincidence that eurozone funds like EZU have outperformed broader Europe funds like VGK this year, with the euro gaining against the dollar. EZU has also outperformed the currency-hedged HEDJ in 2013, largely due to EZU’s full exposure to the euro.


Chart courtesy of

That said, the case for a currency-hedged strategy in Europe looks brighter than a year ago. That has to do with a number of factors, including the ECB’s recent surprise cut in interest rates down to 0.25; the euro’s rally so far 2013; and even the speculation of Fed tapering in the coming year.

And as far as currency-hedged exposure to Europe goes, DBEU is probably the most comprehensive pick. HEDJ has greater liquidity, but ironically, even though the fund targets exporters, it misses out on some major British and Swiss exporting powerhouses, since it targets only companies in the eurozone.

At the end of the day, once you narrow down the exposure you want—Europe, the eurozone or both—and choose whether or not you want currency exposure, picking the best Europe ETF from a crowd of products becomes significantly easier.

At the time this article was written, the author held no positions in the securities mentioned. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.


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