ETF Showdown: Europe, If You Must
Oh Europe. What are we going to do with you? So many problems, so many dominoes left to fall and so little room to adequately address the situation in one article. By now, we can safely say 99.9% of the world's investors know about Europe's sovereign debt woes because that is the primary issue weighing on global equity markets these days.
And most investors know about the woes of ETFs like the iShares MSCI Italy Index Fund (NYSE: EWI) and the iShares MSCI Spain Index Fund (NYSE: EWP). In this week's ETF Showdown, we're going to look at two broader-market European plays to see if there is value or just value trap.
We present you with the SPDR EURO STOXX 50 (NYSE: FEZ) and the iShares S&P Europe 350 Index Fund (NYSE: IEV). An obvious difference to start is that both ETFs are true to the number of holdings mentioned in their titles. FEZ holds 50 stocks while IEV is home to 355 European firms.
IEV may be home to seven times as many stocks as FEZ, but FEZ's expense ratio of 0.29% is less than half of the 0.6% IEV charges. Investors apparently have been willing to pay for access to more European stocks because IEV has $956.3 million in assets under management while FEZ has almost $127 million.
The problem with both ETFs, beyond the fact they're tracking Europe, is exposure to financials. For IEV, it's nearly 18%. It's worse with FEZ at nearly 23%.
If there is a sector in Europe that offers any type of potential over the near-term, it's probably enegy and that means stocks like Royal Dutch Shell (NYSE: RDS-A), BP (NYSE: BP) and Total (NYSE: BP). FEZ only features two oil stocks: Total and Eni (NYSE: E). IEV features a high exposure to the oil patch while offering allocations to all four of the oil stocks just mentioned along with Statoil (NYSE: STO).
Country exposure is critical with these ETFs as well. France and Germany combine for two-thirds of FEZ's weight while Spain and Italy represent another 22%. That's potentially dangerous. The U.K. accounts for over 36% of IEV's weight. France, Switzerland and Germany combine for another 39%, but Italy and Spain combine for just 8%. That's better and it probably explains why IEV has outperformed FEZ by a noticeable margin year-to-date. And it also explains why FEZ is the winner of this week's ETF showdown.
As an aside, the Vanguard MSCI Europe ETF (NYSE: VGK) has outperformed both FEZ and IEV and has a lower expense ratio at 0.14%.
Bull case: Obviously Europe must get its fiscal house in order and that may be a long way off. That said, higher oil prices will benefit the oil stocks mentioned here.
Bear case: Hey, it's in the news everyday. We're living Europe's bear case as we speak.
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