Euro Small-Cap ETF Crushing It

March 31, 2014

As expected, DFE carries a heavier weighting to sectors that are more cyclical in nature—industrials make up 26 percent, while consumer cyclicals make up 15 percent. In comparison, those two sectors make up 12 and 11 percent, respectively, in VGK.

Looking at valuations, with DFE on a tear since July 2012, one would expect some frothy valuations. Yet DFE has a trailing price-earnings multiple (P/E) of 19.37—slightly less than VGK’s P/E of 20.7, which is surprising because DFE is small-cap focused.

In comparison, the cap-weighted MSCI Europe Small Cap Index—used as our benchmark for European small-caps in our ETF Analytics reports—has a trailing P/E of 36.13. True to its “dividend” focus, DFE also sports a portfolio yield of 2.66 percent, yielding roughly 100 basis points more than our MSCI benchmark.

DFE v Benchmark

Not only does DFE have a “value” tilt, it also outperformed the benchmark over the past year, while taking on less market risk (beta of 0.94). In fact, we’re even seeing statistically significant annualized alpha of more than 10 percent, which is quite impressive.

DFE v MSCI 1 Year

Source: Bloomberg

Looking Ahead

State Street Global Advisors recently filed for two ETFs in the space that look interesting—the SPDR Stoxx Europe Small Cap 200 ETF and the SPDR Euro STOXX Small Cap ETF. The first will capture “all Europe” small-caps while the other will capture eurozone small-caps.

I certainly welcome these filings. That said, even after the new launches, I wouldn’t be surprised if DFE remains the de facto way to play small-cap Europe, due to its first-mover status, stability and stellar performance over the years.

Recent news of a surge in consumer confidence in the eurozone—it’s been 20 months now since the Draghi-induced European “rebound” began—only bodes well for a fund like DFE.

While the two State Street filings will certainly add another edge to play Europe’s ongoing recovery, if you’re still bullish on Europe, DFE is solid choice, and it’s very deserving of our Analyst Pick for European small-cap exposure.


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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