An ETF For Quality European Compensation

Investing in Europe, even by way of exchange-traded funds, has been tricky this year. For investors eyeing eurozone economies, the European Central Bank (ECB) has not, despite its best efforts, encouraged investors to dive back into those markets.

In the UK, there is Brexit risk. Negative interest rates have been employed in other major non-Eurozone economies to, at best, mixed results. The region is also dealing with banking issues, particularly in the eurozone. With woes for some of Germany's big banks to a borderline banking crisis in Italy, the eurozone's third-largest economy, it is not surprising the region's financial services stocks are struggling.

In other words, the current environment is conducive to emphasizing the quality factor and dividend growth, objectives the WisdomTree Europe Quality Dividend Growth Fund (WisdomTree Trust EUDG) can help with.

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Current European Economic Environment And ETFs

The WisdomTree Europe Quality Dividend Growth Fund, which turns two in May, follows the WisdomTree Europe Quality Dividend Growth Index. As is the case with some of WisdomTree's other dividend benchmarks, the WisdomTree Europe Quality Dividend Growth Index emphasizes return on equity and return on assets via the growth and quality factors.

“The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets. Companies are weighted in the Index based on annual cash dividends paid,” according to the issuer.

EUDG's underlying index currently yields nearly 2.8 percent. For investors looking for eurozone exposure without a big commitment, EUDG makes sense, as the ETF devotes over 37 percent of its combined weight to the UK and Switzerland. Sweden, Denmark and Norway, none of which are eurozone members, combine for 15.5 percent of the ETF's geographic weight.

EUDG's Advantage

What's important to skittish investors, in addition to the dividends, is EUDG's ability to endure bouts of volatility, which aren't uncommon when investing in Europe.

“We compared the performance of the WisdomTree Europe Quality Dividend Growth Index to both the MSCI Europe Index and the FTSE Developed Europe All Cap Index in order to look at more than one market capitalization-weighted measure of European equity performance. Since early 2014, the overall trend in performance has been mostly downward, with a few upward moves here and there,” said WisdomTree in a recent note.

In its two years of existence, EUDG's index has annualized volatility of just 12.6 percent according to issuer data. That has helped the ETF outperform more traditional Europe funds during Europe's spells of volatility.

As a dividend ETF with volatility-reducing capability, it is not surprising that EUDG's largest sector weight is almost 22 percent to consumer staples. Industrials follow at 20.2 percent.

“In this current market we see a benefit to thinking about higher-quality exposures to European equities. If people believe that volatility could continue, focusing on higher long-term earnings growth potential, return on equity and return on assets could be of interest—especially since looking about these metrics tends to lead toward lower leverage,” added WisdomTree.