Europe's ETFs: Top picks for 2013
10 of the Continent's best exchange-traded funds for the new year.
By this point in the year, it will come as no surprise to most investors that many exchange-traded funds (ETFs) tracking developed European economies have delivered stellar returns in 2012.
Metaphors involving rising from the ashes and Lazarus would be appropriate ways to describe the manner in which many Europe funds have acted this year.
Whether it was yield hunting, the allure of tempting valuations or just a hunch that things could not get much worse, investors embraced an array of Europe-focused ETFs in 2012.
From the largest Eurpope ETFs to the newer names such as the Market Vectors Germany Small ETF (GERJ) to the contrarian plays such as the Global X FTSE Greece 20 ETF (GREK), 2012 was generally a good year in which to be long a couple of Europe ETFs.
What needs to be remembered is that the eurozone still faces a lot of issues. Greece teeters on the brink of a demotion to emerging markets status. Italy is mired in a recession and Spain's unemployment rate is near 26%. With that in mind, here are 10 of the top Europe ETF ideas for 2013.
Vanguard MSCI Europe ETF (VGK): Lost in all the commotion about the Vanguard MSCI Emerging Markets ETF (VWO) changing to a FTSE index is the fact that VGK is doing the same thing. VGK will transition to the FTSE Developed Europe Index next year. VGK's current top-10 holdings are quite similar to the top-10 found in the the FTSE index and the ETF currently holds 455 stocks compared to 511 in the new index.
VGK currently holds shares of companies based in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
On the surface, it appears as if there are not major differences between where VGK is right now and where it is going to in terms of indexes. For those that are long this one fund, one of the marquee Europe ETFs to be sure, they are hoping for a sequel to 2012's impressive run. As of Dec. 7, VGK was up 17.3% year-to-date. The good news is that VGK is up almost 0.7% since Nov. 30. As of that date, VGK's new index was up almost 16.9% on the year, according to FTSE data.
Global X FTSE Nordic Region ETF (GXF): Investors looking for ways to skirt eurozone headline risk only needed to look to the north in 2012. Fortunately for those savvy enough to have gotten involved with the Global X FTSE Nordic Region ETF, that did not mean sacrificing returns as this multi-country fund has surged 24% year-to-date.
Home to companies domiciled in Sweden, Denmark, Norway and Finland, GXF has proven durable without the controversy provided by the ETFs focusing on Southern Europe.
For conservative investors looking for international developed market exposure, GXF provides exposure to steady economies and governments with AAA credit ratings and healthy balance sheets. When it comes to Europe these days, GXF is arguably nirvana.
Global X Norway ETF (NORW): Keeping with the Nordic theme, the Global X Norway ETF has also been an admirable performer this year. With roughly the same volatility, NORW has outpaced the iShares MSCI Sweden Index Fund (EWD) by over 100 basis points.
Of course, past performance is no guarantee of future results and there is some risk with NORW. Namely, it comes from the ETF's heavy allocation in the energy sector and that's due to Norway's status as a major oil exporter. However, Norway's oil production cuts both way. It may make NORW a tad riskier than some would like, but there is a silver lining.
Norway does not just produce oil, but it legitimately reaps the rewards of that production. The country has a $600 billion sovereign wealth fund that can serve as a backstop for the economy in times of duress. Not to mention, Norway has an AAA credit rating, something the U.S. and France cannot say.
First Trust STOXX European Select Dividend Index Fund (FDD): Given that the First Trust STOXX European Select Dividend Index Fund has a 30-day SEC yield of almost 6.5%, the fund is under-appreciated relative to other Europe ETFs.
The problem is that FDD has just $17.2 million in assets under management and that total is low enough to keep some at bay. FDD has also lagged the performance of other, more well-known Europe ETFs thus far in 2012. However, things are not all bad with this ETF. If risk appetite spikes in 2013, FDD is ideally positioned to thrive due to its almost 40% weight to financials. Clearly, a Europe ETF heavily weighted to the financial services sector implies a high degree of risk, but the aforementioned yield implies investors are at least compensated for taking that risk.
iShares MSCI Belgium Capped Investable Market Index Fund (EWK): The iShares MSCI Belgium Capped Investable Market Index Fund has jumped almost 24% this year in a performance that would seem to defy all conventional wisdom. In late 2011, Belgium suffered a spate of credit downgrades.
In fact, EWK was such a laggard last year that it was outpaced by the iShares Spain Index Fund (EWP). How this ETF performs in 2013 is going to be interesting to watch and there are two big reasons why. First, the latest Belgian budget raised investment taxes and takes steps to curb wage inflation there because Belgian wage growth has outpaced that seen in Germany and the Netherlands in recent years.
Second, EWK's 2012 performance has been driven in large part by Anhueser-Busch InBev. That stock is up almost 44% year-to-date and accounts for over 2% of EWK's weight. With ETFs, that type of dependence on one stock works until it doesn't.
iShares MSCI Switzerland Index Fund (EWL): As has been the case with the Nordic ETFs, the iShares MSCI Switzerland Index Fund provided some nice non-Eurozone shelter for investors in 2012 as the fund gained nearly 20%. Despite what many know of Switzerland's status as a banking hub, financials are the third-largest sector weight in this ETF, not the largest.
Those looking for a bit more diversity at the stock level can consider the First Trust Switzerland AlphaDEX Fund (FSZ), which has gained 10% in the past 90 days.
iShares MSCI Austria Investable Market Index Fund (EWO): The lone Austria ETF is 22.5% this year and with a price-to-earnings ratio of 15.34 and a price-to-book ratio of 1.51, the ETF is cheaper by those metrics than the comparable France ETF.
On the other hand, Austria should be inexpensive because its economy is offering little in the way of growth.
The Oesterreichische Nationalbank, Austria's central bank, last week pared its 2012 GDP growth forecast to 0.4% from a previous estimate of 0.9%. For 2013, the estimate was slashed to growth of 0.5% from a the prior estimate of 1.7%.
WisdomTree Europe Hedged Equity Index Fund (HEDJ): The WisdomTree Europe Hedged Equity Index Fund might be one of the better new ETFs a lot of folks have not heard about. That is because HEDJ is not a new ETF by the standard definition. Rather, it is an old ETF with a new twist -- or rather, new "twists."
Earlier this year, WisdomTree dramatically reduced HEDJ's exposure to bank stocks, eliminated 12 currencies from the ETF's lineup while increasing the ETF's allocations to European dividend-payers that derive the bulk of their sales from outside of the Eurozone. HEDJ debuted in its new form on August 30. Since then, the ETF has gained 8.3%.
PowerShares BLDRS Europe Select ADR Index Fund (ADRU): The BLDRS Europe Select ADR Index Fund may not be a household name among Europe ETFs, but the fund is up 15% this year. Chances are investors are familiar with at least a few of ADRU's holdings because all 83 of them trade in the U.S. Top-10 holdings include Novartis, BP (BP) and Royal Dutch Shell (RDS.A).
Health care and staples names combine for 31% of ADRU's weight, but financials and energy stocks combine for almost 39%. That gives this ETF plenty of risk on feel to it. ADRU's average daily volume, or lack thereof, could be a turnoff for some, but remember most of this ETF's holdings are heavily traded on U.S. exchanges. Those factors should provide for decent liquidity and tolerable bid/ask spreads.
iShares MSCI Germany Index Fund (EWG): There is no point in ignoring the 800-pound gorilla in the room. The room being the eurozone economy and the gorilla being Germany. In recent days, the Eurozone's largest economy has been home to a spate of mixed economic data points. Last week, the Bundesbank forecast German GDP growth in 2013 of just 0.4%, down from an estimate of 1.6% in June.
The central bank has also warned about another German recession. On the other hand, German exports rose slightly in October. As is often seen with many ETFs focusing on Europe, the bull case for the iShares MSCI Germany Index Fund involves a lot of "ifs." In this case, the ifs are if emerging markets such as China rebound and if German GDP growth could surprise to the upside, EWG might be able to build on its 27.2% gain to this point in 2012 next year.
All of those sentiments can be applied to the Market Vectors Germany Small-Cap ETF as well. Actually, the biggest concern is Germany's ability to dodge another recession. Most of the respondents in a recent Bloomberg survey do not think Germany can do that.
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