Europe ETFs Grab Value Spotlight

September 13, 2019

European equity ETFs have been largely unpopular this year, bleeding nearly $6 billion in combined assets amid an ongoing global economic slowdown.

That tide, however, could be about to turn due to two key factors: quantitative easing and bargain hunting.

The European Central Bank cut its deposit rate further yesterday into negative territory by 10 basis points, to negative 0.50%, and it announced the restart of its asset-buying program in November. The quantitative easing measures are expected to boost the eurozone economy. Expectations of this move had European stocks riding higher for over a week.

Companies like BlackRock have recently talked about their changing stance on European equities, saying they were turning “constructive” on the segment, and upgrading the region from underweight to neutral.

‘Tail Wind For Equities’

“The European Central Bank’s fresh monetary stimulus could provide a tail wind for equities,” BlackRock’s Chris Dhanraj said in a recent blog. “We believe the negative sentiment toward the region may be overdone when comparing Europe’s risk to emerging markets, and its valuations to U.S. equities.”

Risks still abound in Europe, BlackRock says. The region has been plagued with weak inflation and economic growth year on year of just over 1% as of the second quarter. But there’s value in the region. According to BlackRock, valuations in eurozone equities relative to the U.S. are the lowest they’ve been in nearly a decade, as the chart below shows:

 

Source: BlackRock

 

Performance Picks Up, Demand Lags

The question now is whether this combination of European quantitative easing coupled with hopes that the U.S.-China trade dispute will soon find a resolution and bargain hunting from oversold levels could push investors back into Europe-linked ETFs. Recently, the impact on fund performance is evident.

Consider the iShares MSCI Europe Financials ETF (EUFN), the largest ETF to invest exclusively in the European financials sector. In September alone, the fund has rallied about 8%, bringing year-to-date gains to 8.7%:

 

The largest Europe equities ETFs have also seen similar spikes in performance in recent days, nearing recent untested highs.

The $5.3 billion iShares MSCI Eurozone ETF (EZU), which invests in countries that use the euro— excluding the U.K., Switzerland and Sweden—is now up 15% year to date. The broader developed Vanguard FTSE Europe ETF (VGK), with $13 billion in assets, is up 14%:

 

Charts courtesy of StockCharts.com

 

That said, ETF investor dollars have yet to follow. For the most part, some of the largest Europe-linked ETFs have been net asset losers this year: 

 

Ticker Fund YTD 2019 Net Flows ($M) 2019 AUM ($M) % of AUM
EZU iShares MSCI Eurozone ETF -1,695.47 5,367.68 -31.59%
VGK Vanguard FTSE Europe ETF -1,222.97 12,891.72 -9.49%
HEDJ WisdomTree Europe Hedged Equity Fund -1,176.79 3,393.32 -34.68%
FFEU Barclays ETN+ FI Enhanced Europe 50 Exchange Traded Notes Series C -801.81 12.60 -6363.12%
FIEE UBS AG FI Enhanced Europe 50 ETN -509.54 27.62 -1844.50%
FEZ SPDR EURO STOXX 50 ETF -466.07 2,167.14 -21.51%
RSX VanEck Vectors Russia ETF -452.88 1,147.40 -39.47%
IEV iShares Europe ETF -433.21 1,648.83 -26.27%
HEZU iShares Currency Hedged MSCI Eurozone ETF -427.01 877.58 -48.66%
EWG iShares MSCI Germany ETF -345.33 2,029.80 -17.01%

 

Asset Gains Very Small

One of the shining exceptions here is the JPMorgan BetaBuilders Europe ETF (BBEU), which has gathered more than $1 billion in net inflows year to date.

BBEU invests in developed European countries, covering about 85% of market cap in the region, for a price tag of just 0.09%. Since it launched just over a year ago, it has grown to a $3.8 billion fund.

J.P. Morgan has been known to bring its own client assets into its proprietary ETFs, so chances are this is in-house asset allocation more than organic, outside-driven demand. And like most of the other net asset gainers this year, it has seen the bulk of its inflows come in the earlier months of 2019, before trade wars and recession talk really took hold this summer.

The list of top net asset gainers is populated mostly by single-country strategies, as seen below, and asset flows in the aggregate have been really small this year: 

 

Ticker Fund YTD 2019 Net Flows ($M) 2019 AUM ($M) % of AUM
BBEU JPMorgan BetaBuilders Europe ETF 1,048.04 3,763.37 27.85%
EWQ iShares MSCI France ETF 594.35 1,225.38 48.50%
EWU iShares MSCI United Kingdom ETF 246.85 2,039.66 12.10%
EWL iShares MSCI Switzerland ETF 45.78 1,048.76 4.37%
FLEE Franklin FTSE Europe ETF 36.98 112.32 32.92%
FXB Invesco CurrencyShares British Pound Sterling Trust 29.10 161.58 18.01%
ERUS iShares MSCI Russia ETF 25.84 647.52 3.99%
HEWU iShares Currency Hedged MSCI United Kingdom ETF 25.42 41.17 61.73%
EPOL iShares MSCI Poland ETF 20.68 270.50 7.65%
GREK Global X MSCI Greece ETF 19.01 335.91 5.66%

Tables source: ETF.com, FactSet Data

 

Contact Cinthia Murphy at [email protected]

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