4 ETFs to Bet on Eurozone Recovery

The Eurozone is finally showing some signs of recovery, at least as indicated by the recently released GDP data. The European Union released data showing that the GDP of the 19 countries comprising the Eurozone advanced 0.6% during the first quarter of 2016 as compared with the year-ago quarter. This is encouraging considering that the GDP grew by 0.3% in the Eurozone in the fourth quarter of 2015. Seasonally adjusted GDP rose by 1.6% in the Eurozone in the first quarter of 2016.

Meanwhile, the European Central Bank (ECB) has launched several easing measures to boost growth in the economy and arrest deflationary pressures. The bank has lowered the deposit rate to a historic low of negative 0.4% from the previous rate of negative 0.3%. Meanwhile, the main refinancing rate was lowered to zero, which is expected to boost liquidity in the banking system. It also cut its marginal lending rate by 0.05% to 0.25%. If this was not enough, monthly asset purchases were raised to EUR 80 billion from EUR 60 billion previously (read: Surprise ETF Winners & Losers Post ECB Easing).
 
Challenges Remain
 
However, the road to recovery is fraught with challenges. In February, industrial production in the Eurozone fell 0.8% from January. Industrial production fell more than expected in February thanks to lower output of non-durable goods such as clothes and food as per a Reuters report. This marred the hopes of recovery that have been building post strong data in January (read: Surprise Lift in Eurozone Industrial Output: ETFs in Focus).
 
The outlook for the Eurozone received another setback when earlier this month the European Commission (EC) estimated that the annual growth this year for both the Eurozone and the EU will be slightly weaker than previously issued. EC cited various reasons including global growth slowdown, particularly issues related to China, geopolitical tensions and uncertainty ahead of Britain’s decision on EU membership, which could weigh on the economy (read: British ETFs in Focus as Brexit Debate Flares Up).
 
Despite these concerns, investors who believe that Europe is poised for a turnaround could catch the beaten down Eurozone-focused ETFs like iShares MSCI Eurozone ETF (EZU), SPDR EURO STOXX 50 ETF (FEZ), iShares Currency Hedged MSCI Eurozone ETF (HEZU) and Deutsche X-trackers MSCI Eurozone Hedged Equity ETF (DBEZ). EZU, FEZ, HEZU and DBEZ were down 2.4%, 3.4%, 3.5% and 3%, respectively, in the last 10 days. All the ETFs carry a favorable Zacks ETF Rank of 3 or ‘Hold’ rating, suggesting room for upside (see all European Equity ETFs here).

ETFs in Focus

EZU

This product tracks the MSCI EMU index. It is one of the most popular ETFs in the broader European space with AUM of nearly $11.5 billion and average daily volume of more than 8 million shares. It charges investors 0.48% in annual fees. The fund holds about 246 securities in its basket with none holding more than 3% share. It has a definite tilt toward financials at 20.6%, followed by consumer discretionary (14.6%) and industrials (13.9%). From a country look, France and Germany take the largest share in the basket with 32.3% and 29.3%, respectively, while Spain, the Netherlands and Italy round off the top five (read: Will European ETFs Continue to Underperform SPY?).

FEZ

This fund follows the EURO STOXX 50 Index. The fund has AUM of over $3 billion, and average daily volume of around 3.2 million shares. Expense ratio comes in at 0.29%. Holding 53 securities in its basket, the product is pretty well spread out across components with no firm making up for more than 5.5% of assets. The fund is tilted toward financials (23.5%), followed by a double-digit exposure each in industrials (13.4%), consumer staples (12%), healthcare (11.1%) and consumer discretionary (10%). In terms of country allocation, France and Germany are leading with 37.4% and 31.8% share, respectively, followed by Spain (10.3%), the Netherlands (7.8%) and Italy (6.7%).

HEZU

The fund follows the MSCI EMU 100% USD Hedged Index and is a play on the popular unhedged fund EZU with a hedge to strip out the euro currency exposure. The fund holds well-diversified securities in its basket dominated by financials (20.7%) and followed by consumer discretionary (14.7%), industrials (14%) and consumer staples (11.9%) (read: 11 Most Popular Currency Hedged ETFs).

The ETF has amassed $2 billion in its asset base and trades in good volumes of more than 2.4 million shares a day. The fund charges 51 bps in annual fees from investors.

DBEZ

The fund tracks the MSCI EMU IMI U.S. Dollar Hedged Index. This 593-stocks ETF has amassed about $74.7 million and trades in paltry volumes of more than 48,000 shares a day. The product is highly diversified with no stock accounting for more than 2.7% of the portfolio. Sector-wise, financials gets the highest exposure with 20.8% of the portfolio. Industrials, consumer discretionary and consumer staples also have double-digit allocation. As far as country exposure is concerned, France (30.3%) and Germany (29%) get top priorities. The fund charges 45 bps in fees.

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ISHARS-EMU IDX (EZU): ETF Research Reports
 
SPDR-EU STX 50 (FEZ): ETF Research Reports
 
ISHARS-CH MS EM (HEZU): ETF Research Reports
 
DEUTS-XT MS EMU (DBEZ): ETF Research Reports
 
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