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Internal Focus Works In Europe

July 24, 2017 8:31 am
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Exchange-traded funds dedicated to European equities have among the leaders of the ex-U.S. developed markets renaissance this year. While many of these ETFs, by intent or incident, are heavily exposed to European exporters, investors should note Europe's domestic economies are rebounding, providing opportunity with equities more levered to that theme.

The WisdomTree Europe Domestic Economy Fund (BATS: EDOM) is an ideal ETF with which to play the rebound in Europe's local economies. A year-to-date gain of almost 25 percent confirms as much. EDOM, which is almost two years old, follows the WisdomTree Europe Domestic Economy Index.

That market capitalization-weighted benchmark “is designed to provide exposure to European companies that are most sensitive to economic growth prospects in the Eurozone and that derive more than 50% of their revenue from Europe,” according to WisdomTree

A Stellar First Half

Europe ETFs have been delivering impressive performances since the start of this year, but EDOM was among the leaders in the group during the first six months of 2017.

“The WisdomTree Europe Domestic Economy Index, notable for its focus on companies that derive more than 50% of their revenues from INSIDE Europe, delivered a 20.6% return over this period,” said WisdomTree in a recent note. “We’ve generally heard that the European thesis in 2017 is dependent upon activity in Europe turning up and looking stronger. This Index is designed to tap into that type of exposure, whereas both the MSCI EMU and FTSE Developed Europe All Cap Indexes focus predominantly on large caps, many of which are multinationals.” 

EDOM is heavily allocated to three sectors: financials services, industrials and consumer discretionary. Those sectors combine for almost 80 percent of the ETF's weight, according to issuer data.

Right Place, Right Time

Last year, European bank stocks were a toxic bet, but that trend is changing for the better this year. For example, the MSCI Europe Financials Index is up 22 percent year to date, indicating EDOM's nearly 31 percent weight to financials is benefiting investors.

“If investors are looking at Financials as an opportunity, this Index has definitely tapped into that sector, and it has benefited recently from the equity reaction that occurred as a result of the recent announcements out of Italy,” said WisdomTree. “Notably, this Index is designed not to have exposure to Utilities, Telecommunication Services, Health Care or Consumer Staples due to its positioning as a European cyclical growth-oriented index.”

EDOM allocates about 48 percent of its weight to France and Germany, the eurozone's two largest economies. Italy, the region's third-largest economy, chimes in at 17 percent.

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