Among the major developed markets, the United States remains the equity market leader this, but often vexing Europe is proving sturdy as well. The S&P Europe 350 Index is up more than 15% on a year-to-date basis.
What Happened
Still, investors may have trust issues with European stocks and the related exchange traded funds and that's understandable. For the three years ending June 24, the S&P 500 is higher by 49.3% while the S&P Europe 350 Index is up just 23.3%. Making that performance gap all the more glaring is that the S&P Europe 350 Index has been 170 basis points more volatile than the S&P 500 during that period.
Investors looking for a conservative approach to European stocks may want to consider doing so with dividends and the O’Shares FTSE Europe Quality Dividend ETF OEUR.
Why It's Important
OEUR, which turns four years old in August, follows the FTSE Developed Europe Qual/Vol/Yield 5% Capped Factor Index.
That index “is designed to measure the performance of publicly-listed large-capitalization and mid-capitalization dividend-paying issuers in Europe that meet certain market capitalization, liquidity, high quality, low volatility and dividend yield thresholds,” according to O'Shares.
While OEUR purposefully eschews riskier high dividend stocks in favor of quality dividend growers, the fund has a tempting dividend yield of 3.69%, or about 180 basis points more than the dividend yield on the S&P 500.
Just six of the ETF's top 10 geographic exposures are Eurozone economies and as is the case with many Europe dividend strategies, OEUR is heavily allocated to the U.K. and Switzerland. Those countries, both of which are among Europe's top dividend growth markets, combine for about half of OEUR's weight.
What's Next
The difference maker for OEUR is an emphasis on return on assets (ROA).
“Companies with the strongest average return on assets in the STOXX Europe 600 index were among the best performers over the past 5 years,” according to O'Shares research.
Data confirm emphasizing ROA is a winning strategy.
“First quartile companies by ROA generated an average annualized return of ~8.5% over the past 5 years,” said O'Shares. “Fourth quartile companies by ROA generated an average annualized return below -1.0% over the past 5 years.”
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