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How to add Euro and Europe exposure.


If you believe that the Euro and Europe nations are approaching reasonable valuation, you might be considering the most suitable vehicle to add exposure to your investment portfolio.

Exchange Traded Fund (ETF) screening tools can help sort through and narrow down the ETF choices for Euro, Europe or Europe Asia Far East (EAFE) exposure. (Don’t forget to use the PIAC average Canadian Pension plan asset allocation as a reference portfolio when building your own portfolio).

My choice would be Vanguard’s MSCI Europe ETF (VGK). It looks to be the most diversified, add the most desirable country and sector exposures and is the least expensive ETF for new positions. Vanguard’s MSCI EAFE ETF (VEA) is still a good choice for adding to existing legacy EAFE holdings.

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Using the IndexUniverse.com or Bloomberg ETF selection tool, the Euro and Europe ETF choices come down to a handful. (Using the TMX tool, there are no Europe ETFs listed under Europe … you can find them under Global. These are the hedged versions and won’t be considered here. The ETFinsight.ca tool doesn’t add anything different to the analysis). The tools produce a list of 13 ETFs. I dropped 8 as specialty ETFs and added 1 EAFE ETF. Below we look at these 6.

The candidates are:

(VGK) Vanguard MSCI Europe ETF
(VEA) Vanguard MSCI EAFE ETF
(FEU) SPDR® STOXX® Europe 50 ETF
(FEZ) SPDR EURO STOXX 50 ETF
(EZU) iShares MSCI EMU Index Fund
(IEV) iShares S&P Europe 350 Index Fund

Euro, Europe, EAFE ETFs

Euro exposure.

If you want a pure Euro play, look at FEZ. The country exposures are very concentrated; France (37%), Germany (31%), Spain (12%) and Italy (8%). (Top 4 countries = 88%). FEZ has only 56 individual stock holdings and is sector focused as well (22% Financials). Importantly, FEZ captures only 60% of the free-float market capitalization for the Euro STOXX Total Market index.

EZU has similar exposures as FEZ, 252 stocks but twice the MER.

Euro Europe Country Exposure

Europe exposure.

FEU is a broader play than FEZ. It provides Euro plus broader Europe country exposures. FEU adds U.K. (44%) and Swiss (18%) to Germany (14%) and France (11%) exposures. (Top 4 countries = 86%).  As a result, the sector exposures are very different; Consumer Staples (20%), Health care (19%) then Banking (17%). This is welcome diversification for Canadian investors as Consumer Staples and Health care are in short supply while Banking exposure can be found in abundance in most all portfolios. Still FEU has only 56 stocks and captures only 50% of the free-float market capitalization of the STOXX Europe Total Market index.

The broader (and, I think, better) Europe play is VGK. It has similar country exposures as FEU (with slightly less U.K.) but is more diversified across 456 stocks. Thus it reaches into mid-capitalization space (which will compliment Canadian-centric portfolios as well). It also has the same top 10 holdings as FEU (with a slightly different order). And it’s less expensive at 0.14% MER.

IEV has similar exposures as VGK (and FEU) but has 356 stocks and four times the MER.

Euro Europe Sector Exposures

Europe Asia Far East (EAFE) exposure.

VEA is the choice for legacy portfolios that already hold EAFE. It provides all the exposure to Europe of VGK but adds Japan (22%). As such, it’s the most diversified but EAFE adds ~9% Australia which means more commodities exposure … something Canadian investors don’t need more of.

Valuation.

Most Euro and Europe nations, the U.K. and Japan are all in recession. Forward PE’s for Europe and Japan are in the single digits. See the BCA Research report indicating Europe is at its cheapest relative to U.S. stocks in 40 years. Also see When Germany Leaves the Euro and An EAFE Triple Play.

Disclosure.

I own VEA but will use VGK for new positions.

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Next time? More Risk Management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan

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