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A Europe ETF To Revisit

February 22, 2017 11:53 am
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Amid uncertainty regarding the Federal Reserve's plans for U.S. interest rates and the potential for widespread political volatility in the eurozone, some investors may be skittish regarding European equities and exchange-traded funds this year.

Still, the iShares Currency Hedged MSCI Eurozone ETF (NYSE:HEZU), which tempers fluctuations between the euro and U.S. dollar, is up about 2.3 percent year-to-date. Data suggest some investors started spying recovery in eurozone equities last year and started allocating capital to Europe ETFs.

A Look At Europe, Eurozone ETFs

“Indeed, after a year of considerable outflows, European equity exchange-traded products (ETPs) started seeing inflows in late 2016, gathering over $6.8 billion globally since November,” said BlackRock in a recent note.

Related Link: What’s In An ETF Name Often Requires Further Investigation

HEZU is typical of many dedicated eurozone ETFs in that Germany and France, the region's two largest economies, loom large. In order, France and Germany combine for over 62 percent of HEZU's weight. With national elections looming in France and Germany this year, that geographic exposure could potentially heighten HEZU's volatility.

France's election is not free of controversy and that could controversy is likely to increase if far-right candidate Marine Le Pen advances to the May run-off. Additionally, the Netherlands appears to be on course to embrace a populist, far-right candidate when voters there head to the polls later this month. Dutch stocks represent 11 percent of HEZU's lineup, making the Netherlands the ETF's third-largest country weight.

Good News For HEZU

The good news is that their fundamentals, including improving earnings, are on the mend for European stocks.

“An earnings recession will likely end this quarter and eurozone equities may see a rebound in profitability as a weaker euro and a reflationary environment bring earnings estimates higher, led by banks and commodity-related sectors,” said BlackRock. “In addition, headwinds from recent years including extremely low inflation and weak emerging market growth, seem to be abating. Earnings revisions are accelerating at one of the fastest rates in developed markets and could help drive eurozone equities’ performance (source: Thomson Reuters).”

HEZU's largest sector weight is almost 19 percent to financial services. The ETF also features decent commodities-related exposure as materials and energy names combine for over 14 percent.

Eurozone stocks are cheap compared to other developed markets with the price-to-book ratio on the region's equities residing at multi-year lows.

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