Just when the European recovery story looked played out, the European Central Bank sent out a new mating call to equity investors with a major policy package that included rate cuts.
Europe ETFs have already attracted more than $10 billion this year. That's more than 20 percent of all inflows going into a category that makes up 3 percent of all ETF assets. Over the past 12 months, European region ETFs have attracted $27 billion, an asset gain reminiscent of the $18 billion that flooded into Japan ETFs in 2013.
What investors like about Europe, and Japan and the U.S. for that matter, is a central bank pushing up equity markets through aggressive monetary policy. Last week Mario Draghi, the European Central Bank president, announced a policy package including rate cuts and laying the groundwork for possible asset purchases similar to the U.S. Federal Reserve's quantitative easing program. This is like laying a pheromone trail for equity investors, who have seen similar central bank actions boost stock markets in the U.S. and Japan.
The other side to this story is Europe’s recovery from its debt crisis. How much more can the region's stock markets recover after a two-year return of more than 60 percent for most European indexes?
Here are three ETFs that give investors entree to Europe, each with very different exposures. All are very liquid and about as volatile as the S&P 500 Index.
Vanguard FTSE Europe ETF (VGK)
VGK tracks the entire European region and has a 50 percent allocation to countries outside the euro zone, such as the U.K. and Switzerland. VGK is the cheapest in its class, with a fee of 0.12 percent of assets annually. It has hauled in $3 billion this year; its $9.4 billion intake in the past 12 months was the most of any ETF in any category. VGK is up 7 percent this year and 66 percent over the past two years.
iShares MSCI EMU ETF (EZU)
EZU takes a more targeted approach. It has allocations only to countries that use the euro. That includes a 30 percent allocation to both France and Germany, and an 11 percent in Spain. This makes EZU more sensitive to Draghi's rate and policy actions. EZU has taken in $3 billion this year, and its $8.2 billion intake in the past 12 months trails only VGK. EZU is up 7 percent this year and 77 percent over the past two years. It charges investors 0.50 percent.
WisdomTree European Hedged Equity Fund (HEDJ)
Like EZU, HEDJ tracks only euro zone countries, but it hedges the impact of the euro by shorting the currency. That leaves investors with pure exposure to the local stocks and a bit less volatility from currency fluctuations. This ETF could be the one to benefit most from further ECB policy if Draghi decides on asset purchases that devalue the euro and push up stocks.
HEDJ screens for companies with at least 50 percent of revenue from outside the euro zone. Those are exactly the type of companies that will benefit from a lower euro. Since mumblings about ECB action began a month ago, the euro has declined and HEDJ has surged past VGK and EZU, up 4 percent, versus 2 percent for the others. More than $900 million has flowed into HEDJ in 2014, helping double its size to $1.7 billion. The ETF charges 0.58 percent per year. It's up 8 percent this year and 48 percent in the past two years.
More stories from Eric Balchunas:
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