David Dierking
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David Dierking in ETF Focus,

Europe ETFs Present A Compelling Risk/Reward Tradeoff

For most of the current decade, the U.S stock market has been the place to be. In fact, no other major region of the world has even come close to its performance. Since the beginning of 2010, the S&P 500 (SPY) has returned more than 140%. That’s easily more than double the return of Europe, Asia and the emerging markets over the same time frame.

Foreign investing hasn’t been terribly profitable lately but that may be starting to change. While the U.S. has posted a respectable 5% gain thus far in 2017, it’s trailing the emerging markets (up 13%), China (up 13%), Japan (up 6%) and Europe (up 8%). With the domestic stock market looking relatively expensive and the Trump rally showing signs of fatigue, it might be a good time to start looking overseas for better opportunities.

Europe strikes me as one of the more intriguing options right now. The Vanguard FTSE Europe ETF (VGK) is one of the cheapest and broadest plays on the region but it’s not a pure Eurozone play. A full 30% of the fund’s assets are invested in the United Kingdom with smaller allocations to countries like Switzerland, Sweden and Denmark. Investors looking for a pure Eurozone play may want to look at the iShares MSCI Eurozone ETF (EZU).

Why is Europe particularly attractive right now? Quite simply, the European economic engine is starting to rev again. Eurozone PMI grew at its fastest pace in nearly six years in the first quarter. That’s particularly welcome news for the ECB which is starting to see the significant stimulus measures it has put in place to spur growth and lift inflation finally paying dividends. The overall Eurozone economy grew by roughly 0.6% in the most recent quarter, wage growth is showing signs of improvement and an increasing global trade is helping spur further growth.

On top of that, European equities look relatively inexpensive. The Eurozone ETF trades at a P/E ratio just under 17 compared to the 19 multiple of the S&P 500. The fund’s price-to-book ratio of 1.6 is nearly half that of the U.S. market. Income seekers may find the Eurozone ETF appealing from a dividend yield standpoint as well. The fund’s current yield of 2.3% is not terribly higher than that of the S&P 500 but yields of 3% and up can be found with broader Europe funds like Vanguard’s Europe ETF and the SPDR Euro STOXX 50 ETF (FEZ).

Investing in Europe right now comes with its share of risks. U.K. Prime Minister Theresa May is scheduled to initiate the Brexit process this week bringing into question how the country will unwind the many trade and economic agreements it has with its soon-to-be former EU partners. Germany and France, the region’s two largest economies, are scheduled to hold national elections this year, while Greece continues to teeter on the brink of financial collapse. Italy could be heading down the road to a similar banking crisis and is supposedly weighing its own exit from the EU.

Undervalued growth plays are getting increasingly difficult to find, but Europe is looking interesting for longer-term investors who are willing to let the story play out. Once the political uncertainty in the region that I suspect we’ll see throughout all of 2017 begins dying down, the Eurozone’s improved economic environment should be ready to take center stage.