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Making a Deposit With The European Bank ETF

November 6, 2015 2:17 pm
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When it comes to exchange traded funds that hold bank stocks, many U.S. investors focus on familiar ETFs, such as the Financial Select Sector SPDR (NYSE: XLF) and the iShares U.S. Financials ETF (NYSE: IYF), but that domestic bias could be costing those investors opportunity across the Atlantic.


The $340.3 million iShares MSCI Europe Financials ETF (NASDAQ: EUFN) does not have the look of an ETF chock full of upside potential. EUFN has tumbled 9.8 percent over the past 90 days as investors have seemingly punished the fund on the back of dour news, including massive job cuts and substantial share price retrenchment, at Deutsche Bank AG (NYSE: DB). However, Germany's largest bank accounts for just over two percent of EUFN's weight and is not even a top 10 holding in the ETF.


Against the backdrop of the European central bank's quantitative easing efforts, EUFN merits some consideration, particularly if Eurozone inflation picks up. Still, it must be noted that a significant portion of EUFN's geographic weight lies outside the Eurozone. For example, the U.K., Switzerland and Sweden combine for about half of the ETF's weight. Conversely, Germany, France, Italy and Spain, the Eurozone's four largest economies, combine for 40 percent of EUFN's geographic weight.


Morgan Stanley recently highlighted the under-performance of European banks relative to the region's inflation expectations. That could be a sign market participants are not fully appreciating the opportunity set being offered by EUFN and its 102 holdings.


In a note out Wednesday, Rareview Macro founder Neil Azous points out recent capital raising initiatives as potentially suppressing upside in European bank stocks. He also notes the inability of major Europe currency hedged ETFs to breakout relative to U.S. rivals as a possible reason for investors' recently tepid approach to European equities. 


EUFN does offer a high yield and some credible dividend growth. The ETF's trailing 12-month dividend yield is 3.63 percent, or nearly 210 basis points higher than the comparable yield on the aforementioned IYF. Plus, even though Deutsche Bank recently said it will eliminate its payout for at least two years, many of the other banks found in EUFN are expected to boost payouts.


“Henderson Global Investors' research said banks were the biggest contributor to an 8.6 percent rise in European dividends during the second quarter of this year. Spanish bank Santander said in September it would look to increase its dividend from 2016 onwards. Italian bank Unicredit also pledged this year to boost its dividend in the future,” according to Reuters


Santander, EUFN's second-largest holding, and Unicredit combine for over six percent of EUFN's weight.


Todd Shriber owns shares of XLF.


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