Six of the best European equity ETFs
ETFs are widely regarded as being excellent products for getting exposure to a wide number of asset classes, but with competing ETF providers using different indices it can be difficult to know where to start. In the fourth of this series we take a look at six European equity ETFs.
Over the past ten years US equity markets have consistently outperformed European equities, with the S&P 500 up 200% (to 31 May 2017) as opposed to a return of just 75% for MSCI Europe. Superior company earnings growth has played a large part in this, but investors should not overlook changes in relative valuation. On a price-to-book basis, Europe started the ten year period on a discount of 6.4%, and ended it on a discount of 20%, close to a 20-year low.
Older investors may recall that Europe was not always so out of favour. In the prior five years, to 31 May 2007, European equities returned 73.6% as opposed to just 8.6% for the S&P 500.
The recent election of Emmanuel Macron as French President has reduced the risk of a break up in the EU, and improving economic data across the region has come hand-in-hand with rising business confidence (e.g. the German IFO hit a record high in May), so it all looks positive for European assets.
From a portfolio perspective, getting exposure to European equities is not as simple as just purchasing the exchange traded fund (ETF) with the lowest total expense ratio (TER). The index providers split Europe up into different sub regions, meaning that competing ETFs may have very different country and sector exposures. There are three main regional indices, which we list below.
- EuroStoxx and EMU (companies from countries within the Eurozone)
- Europe (Eurozone countries plus Scandinavia, UK and Switzerland)
- Europe ex UK (for consideration of UK investors with a home country bias)
The six ETFs listed below represent a good selection of regional European ETFs, with currency hedged, dividend, small cap and environmental, social and governance (ESG) strategies all represented. Investors who are looking for specific country or sector exposure, may use our ETF screener to find the right European equity ETFs.
All the ETFs described below can be bought on IG’s share dealing platform, where commissions start at just £5 and there are no custody or platform fees.
Vanguard FTSE Developed Europe ex UK UCITS ETF (VERX)
This ETF is the lowest cost in this list, with a TER of just 0.12%. A good option for those looking for large cap exposure as it does it very effectively, with approximately 20% invested in France, Germany and Switzerland.
iShares MSCI Europe ex-UK GBP Hedged UCITS ETF (EUXS)
For investors who want to hedge some of their overseas foreign exchange exposure, this iShares ETF provides an efficient way to do it. It has a very low net asset value (NAV) tracking error of 0.1%, and a TER of 0.4%.
UBS MSCI EMU Socially Responsible UCITS ETF (UB39)
Socially responsible ETFs are becoming increasingly popular, and this ETF has been constructed to have a similar country and sector allocation to the parent index meaning it does not take large bets. It excludes businesses that have exposure to alcohol, tobacco and gambling. It has a TER of 0.28%, 56 holdings and yields 2.8%.
iShares Edge MSCI Europe Minimum Volatility UCITS ETF (IMV)
iShares offer a series of different Europe factor ETFs, including momentum, quality, size and value. However this minimum volatility ETF is the largest of them all, with AUM of £1.25 billion and a return profile that has consistently differentiated itself from a market cap index by having lower volatility and drawdowns. It has a TER of 0.25%.
db x-trackers MSCI Europe Small Cap (XXSC)
Improving economic fundamentals in Europe make smaller cap ETFs, which have a greater home bias, a good way to get exposure to rising company profitability. This ETF tracks its benchmark well, and has actually outperformed by 0.1% over three years on an NAV basis. It has a TER of 0.3%.
WisdomTree Europe SmallCap Dividend (DFE)
WisdomTree specialises in offering dividend strategies, and this ETF weights stocks by forecast dividends to offer a well-diversified portfolio. Small caps tend to perform better in bull markets, so it would be vulnerable to swings in sentiment if markets sell off from these levels. It has a TER of 0.38%