Market Overview

Europe ETFs Contend With A Downgrade

Europe ETFs Contend With A Downgrade

After tempting investors in 2017, European stocks and the related exchange traded funds are languishing this year. The iShares Europe ETF (NYSE: IEV), which includes economies in and outside of the Eurozone, is lower by more than 1 percent year-to-date. The iShares MSCI Eurozone ETF (CBOE:EZU), a dedicated Eurozone fund, is off almost 1 percent.

Political volatility, including the recent Brexit tensions, is one of the issues confounding European assets. In a note out Monday, BlackRock downgraded Europe to Underweight.

What Happened

“We see European equities as vulnerable to risks–both global and local. Sentiment already has turned,” said BlackRock. “Investors have yanked money out of European equity funds for 17 straight weeks.”

Brexit risk was the order of the day Monday after Brexit minister David Davis and Foreign Secretary Boris Johnson, bringing new pressure on Prime Minister Theresa May.

“The two departures seemed to shatter May’s own proclamation of cabinet unity last Friday, when she said she believed she had, after two years of wrangling, secured agreement on Britain’s biggest foreign and trading policy shift in almost half a century,” Reuters reported.

The $2.53 billion IEV allocates 28.53 percent of its weight to British stocks, indicating ongoing Brexit turbulence could hamper that ETF.

Why It's Important

Beyond Brexit, there are other risks to consider with Europe ETFs.

“There are also home-grown risks in Europe,” said BlackRock. “An anti-establishment, euro-skeptic Italian government and renewed tensions over immigration have raised long-run risks for the European Union (EU)’s future. A non-committal outcome at the most recent summit of EU leaders gives us little confidence that a crisis would be handled well.”

Italy, the Eurozone's third-largest economy, accounts for just 7.39 percent of EZU's weight. Four countries garner larger weights in the ETF, but Italian political volatility is weighing on EZU this year.

What's Next

With valuations on emerging markets compelling after the recent sell-off and U.S. stocks proving sturdy, broadly speaking, investors may be motivated to evaluate market beyond Europe. Year-to-date, investors have pulled $4.24 billion from EZU, a total surpassed by just four other ETFs.

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