ETF Showdown: A Battle For European Supremacy
Markets surged on Thursday after European Central Bank President Mario Draghi said the ECB could buy an unlimited amount of European bonds to help the continent eradicate its sovereign debt crisis. The news had a palpable impact on major European ETFs. The Vanguard MSCI Europe ETF (NYSE: VGK) surged three percent while the iShares MSCI Spain Index Fund (NYSE: EWP) jumped 5.8 percent.
Both ETFs and others with a focus on the Eurozone have been performing surprisingly well as of late. Perhaps that is a sign more gains are on the way and that means investors would do well to consider a pair of multi-country Europe ETFs with dividend kickers. The First Trust STOXX European Select Dividend Index Fund (NYSE: FDD) and the Wisdom Europe Equity Hedged Equity Fund (NYSE: HEDJ) make for viable options.
HEDJ was recently reborn as an ETF focused on Eurozone-based dividend-paying firms that derive the bulk of revenues from outside that region. Previously, countries such as the he U.K., Japan and Australia combined for over 48 percent of the old fund's weight.
FDD does not focus exclusively on Eurozone companies. At the country level, the U.K. accounts for over 40 percent of the fund's weight while Switzerland and Sweden combine for another 11.4 percent. France and Germany combine for over 25 percent of FDD's weight while other Eurozone members such as the Netherlands, Spain and Italy are featured within the fund as well.
Another critical difference between the two ETFs is sector exposure. In this case, sector exposure means what one of these funds has and what the other does not. In HEDJ's previous version, financials accounted for 22 percent of the fund's weight, but the new HEDJ relegates that sector to a weight of less than eight percent. Financials dominate FDD with an allocation of 37 percent. Telecom and utilities names combine for another 42 percent, so it is fair to say investors looking for sector diversity would prefer HEDJ.
On the basis of superficial metrics such as assets under management and average daily volume, neither fund wows investors. FDD has $12.3 million in AUM with average daily volume of less than 8,900 shares. HEDJ's AUM total is just under $13 million and with ADV of barely over 9,700 shares. FDD is slightly pricier with a net expense ratio of 0.6 percent compared to 0.58 percent of HEDJ.
Regarding performance, HEDJ has gained 7.1 percent year-to-date compared to 2.5 percent of FDD. That difference implies FDD may be suffering from either its large weight to the U.K., which is in a recession, financials or both.
With both funds being dividend plays, yield is another factor to be considered. This where FDD stands out with a 30-day SEC yield of 6.76 percent, according to First Trust data. HEDJ's 30-day SEC yield is just under four percent, according to WisdomTree data.
There are some realities that must be acknowledged regarding investing in Europe. First, ETFs with heavy Eurozone exposure have been in rally mode over the past couple of months. Second, there is still substantial risk investing in the region no matter how many bonds the ECB buys. The Eurozone's high risk profile does not mean investors should ignore European stocks. Rather, elevated regional risk implies investors would do well to focus on those firms that are not heavily dependent on the Eurozone to drive substantial chunks of top-line growth. That is why HEDJ slips by FDD as the winner of this ETF Showdown.
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