Want to add some foreign exposure to your portfolio? How about big-cap Europe? Want to reduce volatility and add some yield to your portfolio? How about big-cap Europe? Want exciting growth? Well, you may need to look elsewhere, but this part of the market has utility in the context of a diversified portfolio.
There are a lot of ETFs now that invest in big-cap Europe. These funds, even the older ones, don't get much attention, probably because so many investors don't bother to look beyond the
iShares MSCI EAFE Index Fund
for foreign exposure.
As you can see (on the chart below) and would expect, all of these funds correlate closely for a short-time period, but there are some structural differences that could matter longer term. The two biggest similarities of all these funds is that they are heavily invested in the financial sector and all have the largest country weight in the U.K.
BLDRs Europe 100 ADR Index Fund
is a remarkably small fund, for being four years old, with only $35 million in assets. It owns the 100 stocks that make up the Bank of New York Europe 100 ADR Index. It would be easy to read through that name without noticing something I think is important, which is that it owns only ADRs.
The other funds are not limited to ADRs, and while most of the holdings in all of these funds do have ADRs, the others are not restricted. It is possible that this restriction contributed to the relative lag. Some numbers: ADRU yields 2.04%, has a beta of 0.95, a standard deviation of 9.49 and has a 0.70 correlation to the
(all of the data points in this article come from
One of the bigger funds in the space is the
iShares S&P Europe 350 Index Fund
. It is obviously very broad based. Like all of these funds, the U.K. is the largest country and the financial sector is by far the largest.
are the two largest holdings. The fund is very unremarkable except that it has been the best performing of the bunch since the listing of the two WisdomTree funds. IEV only yields 1.83%, has a beta of 0.94, a standard deviation of 9.03 and a 0.72 correlation to the S&P 500.
The Vanguard European ETF
has 621 holdings and the lowest expense ratio, 0.18%. Despite having almost twice as many holdings as IEV, the two funds' top tens, besides having nine out of ten in common, have roughly the same weight. The way this works out, the fund has over 400 out of 621 holdings with less than 0.10% weight in the fund, which means they offer very little to the fund's returns.
The fund is doing very well, but I see no big advantage by owning more stocks than IEV. The numbers, not surprisingly, are very similar to IEV's too; it yields 2.06%, a beta of 0.92, a standard deviation of 9.04 and a correlation of 0.71 to the S&P 500.
Another ETF with surprisingly few assets is the four-year-old
streetTracks Dow Jones Stoxx 50
. This fund is much more concentrated than the others with only 50 holdings; the biggest of the European big stocks. The average weighted market cap is $109 billion. The top two holdings, again BP and HSBC, account for 10% of the fund.
Because of its concentration in the biggest stocks, this fund yields a relatively high 3.58%. However, the fund has lagged the other large-cap European funds that have been trading for the last four years. I believe this is because it does have a larger cap size, really mega-cap, and the largest stocks have lagged smaller caps globally over those same four years.
I would expect FEU to provide more performance leadership toward the end of a stock market cycle, which for Europe could still be a ways from coming. FEU has a beta of 0.90, a standard deviation of 9.91 and a correlation of 0.68 to the S&P 500.
The last two funds to touch on are from WisdomTree, and are variations on the same high-yielding theme:
WisdomTree Europe Dividend Index Fund
WisdomTree Europe High-Yielding Equity Index Fund
. DEW is a sort of subset of DEB. DEB has 1088 holdings weighted by dividends, while DEW owns the 313 biggest dividend payers out of the 1088 holdings in DEB. The top tens for each fund have eight names in common, with, you guessed it, BP and HSBC being the largest two components.
The sector weightings of the two are similar, but not exact; DEW has 42% in financials compared to 34% for DEB; DEW is also heavier in telecom and energy. Like all of the funds covered here, the U.K. is largest country weight for each fund, and interestingly, Italy is much larger in DEW and DEB than in the other funds, weighted at 13.7% and 9.1%, respectively.
The dividend yields are the highest of the bunch; DEB yields 3.69% and higher-yielding DEW comes in at 4.6%. DEB has a beta of 0.82, a standard deviation of 10.33 and a correlation 0.55 to the S&P 500. DEW has a beta of 0.93, standard deviation of 10.65 and a correlation of 0.61 to the S&P 500.
One thing about the two WisdomTree funds that I don't quite get is that their research tells them that dividend weighting, the method they use for most of their funds, outperforms cap weighting and maybe fundamental weighting, too. But if dividends are the thing, and both funds are pulling from the same pool of stocks, doesn't that mean that the lower-yielding DEB will always lag the higher-yielding DEW? With only five months of track record, there is not enough data to draw a conclusion yet.
The point of this article was to create some awareness of funds that don't trade a lot or get talked about a lot. If you use broad-based index products for your portfolio, you might find an ETF in this group worthy enough for your portfolio.
As originally published, this story contained an error. Please see
Corrections and Clarifications.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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