Is A Rising Euro Hurting Europe ETFs?

The Euro zone has been gaining a lot of traction lately, owing to speedy growth and high business confidence. The region has been showing strong economic data, as a result of which the currency is rallying.

End to Stimulus?

Mario Draghi, president of the European Central Bank (ECB), remained mum in Jackson Hole about the stimulus measures. Although inflation hit a four-month high of 1.5% in August, it is still below the target of 2% and low wage growth continues to be a drag. Therefore, this indicates that stimulus measures are still required and will not be done away with any time soon.

Although easy money policies weigh on a currency, potential talks of ECB tapering down the stimulus program has driven growth in the euro. This is because you cannot indefinitely extend the stimulus program, primarily because it means purchasing bond worth 60 billion Euros every month and analysts are predicting that the ECB will run out of bonds to purchase in the near future.

Safe Haven Appeal Owing to Geopolitical Uncertainty

Moreover, poor jobs data in the United States and high political uncertainty have been weighing on the greenback.

Increasing geopolitical uncertainty relating to North Korea has increased demand for the euro as a safe haven. North Korea conducted its sixth nuclear test, that of a hydrogen bomb, which can be mounted on an Inter Continental Ballistic Missile, on September 3, 2017. Not only did it trigger an artificial earthquake of magnitude 6.3 but also rattled the markets, with Asian stocks falling while yen, euro and gold surging (read: What Lies Ahead for Gold ETFs?).

Per EPFR, $1.4 billion investor funds were withdrawn from European equity funds in the week ended August 30, 2017. The primary factor for this lack in investor confidence was because a rising euro might weigh on growth potential of the region. It makes European goods expensive for foreigners and thus weighs on export growth.

Let us now discuss a few ETFs that are primarily focused on providing exposure to European equities (see all European Equity ETFs here).

iShares MSCI Eurozone ETF EZU

This ETF is a play on developed European economies using the common currency with a focus on large and mid-cap equities.

It has AUM of $13.35 billion and charges 48 basis points in fees per year. The fund has a 32.23% allocation to France, 28.87% to Germany and 11.20% to Netherlands (as of September 1, 2017). From a sector look, Financials, Industrials and Consumer Discretionary are the top three allocations of the fund, with 20.77%, 14.51% and 13.38% exposure, respectively (as of September 1, 2017). Total SA (PA:TOTF), Sanofi (PA:SASY) SA, and Bayer AG (DE:BAYGN) are the top three holdings of the fund, with 2.66%, 2.41% and 2.30% exposure, respectively (as of September 1, 2017). It has returned 20.91% year to date and 19.46% in the last one year (as of September 1, 2017). It has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: How will Macron's Labor Reforms Impact ETFs).

SPDR Euro STOXX 50 ETF FEZ

This fund is appropriate for investors looking to gain diversified exposure to equities of the euro zone.

It has AUM of $4.32 billion and charges 29 basis points in fees per year. From a geographical perspective, the fund has top allocations to France, Germany and Spain, with 36.03%, 32.47% and 10.85% exposure, respectively (as of September 1, 2017). From a sector look, Financials, Industrials and Health Care are the top three allocations of the fund, with 22.75%, 12.98% and 11.39% exposure, respectively (as of September 1, 2017). Total SA, Sanofi and Siemens AG (DE:SIEGn) are the top three holdings of the fund, with 4.65%, 4.05% and 4.02% exposure, respectively (as of September 1, 2017). The fund has returned 18.94% year to date and 18.30% in the last one year (as of September 1, 2017). It has a Zacks ETF Rank #1 with a Medium risk outlook.

iShares Core MSCI Europe ETF IEUR

This fund seeks to provide exposure to Europe equities across multiple market capitalizations.

It has AUM of $3.12 billion and charges 10 basis points in fees per year. From a geographical perspective, the fund has top allocations to UK, France and Germany, with 28%, 15.23% and 14.29% exposure, respectively (as of September 1, 2017). From a sector look, Financials, Industrials and Consumer Staples are the top three allocations of the fund, with 20.21%, 14.20% and 12.81% exposure, respectively (as of September 1, 2017). Nestle SA (SIX:NESN), HSBC Holdings (LON:HSBA) PLC and Novartis AG are the top three holdings of the fund, with 2.49%, 1.84% and 1.78% exposure, respectively (as of September 1, 2017). The fund has returned 18.08% year to date and 14.52% in the last one year (as of September 1, 2017). It has a Zacks ETF Rank #1with a Medium risk outlook.

Bottom Line

Despite these headwinds, the fundamentals of the Euro area remain strong. Positive growth forecasts and slowing inflation make investing in this region an appealing option.

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