A Europe ETF Right For The Times

February 26, 2018 1:27 pm
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A weak euro and exporters kickstarted the recovery in European stocks and the related exchange-traded funds. With that recovery forecast to continue gaining momentum this year, the time could be right for investors to employ a more internal, cyclical focus.

The WisdomTree Europe Domestic Economy Fund (NYSE:EDOM) can help with that objective.

EDOM holds companies that derive at least half their sales from inside Europe, levering the fund to recovering local economies. The ETF, which debuted in October 2015, is up nearly 4 percent year-to-date. That is better than the roughly 3 percent returned by the MSCI EMU Index.

EDOM follows the WisdomTree Europe Domestic Economy Index, which 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 percent of their revenue from Europe,” according to WisdomTree.

A Cyclical Focus

Part of EDOM's potential benefit to investors is its cyclical emphasis while excluding, slower-growing defensive sectors.

The ETF's index “has exposure to companies with more than 50 percent of their revenue from within the local economy and excludes more defensive sectors (Telecom, Utilities, Health Care, Consumer Staples) to represent the more cyclical elements of the European economy,” said WisdomTree in a recent note.

Proving its cyclical chops, EDOM allocates over 31 percent of its weight to recovering European financial stocks. The cyclical industrial and consumer discretionary sectors combine for over 47 percent of the ETF's weight.

“This concept of cyclical sectors has been an important one given the revival of domestic demand and positive growth impulses coming from the European economy,” said WisdomTree. “With a shifting growth environment, cyclical equity exposures are outperforming defensive equity exposures, and this trend may still be in early phases.”

Big Economies

EDOM is a Eurozone fund, so it doesn't feature exposure to the likes of the U.K., Sweden and Switzerland, countries that are often staples of diversified Europe ETFs.

Still, the Eurozone's largest economies are the major driver's of EDOM's price action. France, Germany and Italy, the region's three biggest economies, combine for about two-thirds of EDOM's geographic exposure.

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