Five top Europe ETFs

I’m not keen on investing in Europe at the moment. (That’s Europe excluding the UK.) The German and French economies are slowing dramatically and I worry about the stability of the eurozone. You’ve also got the continuing conflict between Brussels and Italy, and plenty more besides.

But you may disagree and there’s no doubt that European equities are cheaper than American ones at first glance. The CAPE ratio for the European stock market was around 20 at the end of November whereas it was around 29 for the US. After recent market falls, those ratios will be a bit lower by now, but Europe’s relative cheapness won’t have gone away.

And anyway, even I – with all my doubts – still have a very modest exposure to Europe. It’s too big a market too ignore completely.

So if you want to invest in European stocks using ETFs, here are five top Europe ETFs for you to consider.

  1. X-trackers Stoxx Europe 600 UCITS (GBP) XSX6

This ETF gives you exposure to a broad range of European stocks via the Stoxx Europe 600 index. This represents about 98% of the developed Europe stock market, so you are only missing out on tiddlers here. The annual charge is also nice and low at 0.2%.

The Stoxx 600 is a market-cap weighted index so that means the weighting is tilted towards the largest companies in the index. However, compared to some other market-cap based indices, that tilt isn’t too offputting. The top ten stocks in the index comprise about 18% of the ETF by value. The top ten holdings include Nestle, Novartis, HSBC and Shell.

You’ll notice that some of those names are UK-listed; this ETF includes UK-listed shares. If you want a Europe ETF that excludes UK-listed shares, we’ll have one later in this list. Around half of the fund is invested in eurozone-listed stocks while UK stocks account for a bit more than a quarter of the ETF. Remember, many of these businesses are large global companies, they’re not just operating in their home markets.

Here are the five largest sectors in the ETF:

Sector % of ETF
Financial Services 19.1
Health 14.5
Consumer Defensive 13.4
Industrials 12.2
Consumer Cyclical 10.1

Source: Morningstar

Excluding 2018, the recent performance, which includes dividends, has been pretty good too:

2018 2017 2016 2015
-9.9% 15.3% 18.9% 3.3%

Source: Just ETF

  1. Invesco Euro Stoxx 50 UCITS ETF (GBP) | SX5S

If your top priority is low fees, then this could be the ETF for you with just a 0.05% annual charge. (The HSBC Euro Stoxx 50 also charges 0.05%)

The Euro Stoxx 50 index is focused on companies in the eurozone, so it largely avoids companies based in the UK. It avoids Swiss companies too.

Here are the five largest sectors in the ETF:

Sector % of ETF
Financial Services 17.3
Industrials 12.3
Consumer Cyclical 12.3
Consumer Defensive 10.9
Health 10.2

And this is the recent performance:

2018 2017 2016 2015
-10.8% 13.6% 21.6% 0.7%

3. Vanguard FTSE Developed Europe ex UK UCITS ETF (GBP) | VERX

Like the Invesco ETF, this fund steers away from the UK, and it also has relatively broad exposure with around 420 stocks. The fee is low at 0.12% and the ETF has a full replication policy. In other words, it invests in all the shares in the FTSE Developed ex UK index.

Here are the top five sectors in the ETF:

Sector % of ETF
Financial Services 21.3
Industrials 13.8
Health 13.4
Consumer Defensive 12.5
Consumer Cyclical 10.5

And here’s the performance:

2018 2017 2016 2015
-10.0% 16.3% 20.0% 4.8%
  1. Xtrackers MSCI Europe Small Cap UCITS ETF (GBP) | XXSC

There’s plenty of evidence that smaller companies outperform their larger brethren over the long term. So it makes sense to get some exposure to European small caps.

This ETF tracks the MSCI Europe Small Cap index. This comprises smaller stocks across 15 countries including the UK and it has 999 constituents. It covers about 15% of the European stock market by value. Stocks are weighted by market cap within the index.

It’s a physical ETF but it does use sampling. In other words, it invests in a broad range of companies in the index but doesn’t buy them all.

Here are the five top sectors in the ETF:

Sector % of ETF
Industrials 21.6
Financial services 15.2
Consumer Cyclical 13.3
Technology 10.5
Real Estate 10.1

And here is the recent performance:

2018 2017 2016 2015
-15.2% 23.3% 18.1% 16.4%
  1. ishares Edge MSCI Europe Value Factor UCITS ETF (GBP) | IEFV

In terms of where we’re at in the economic cycle, now isn’t the perfect time to buy value stocks. Value strategies normally do best when an economy is coming out of a recession.

That said, value stocks currently look cheap compared to historic valuations, and it’s a strategy that has done well over the long-term in the past. So I think it makes sense to give my portfolio a value tilt by investing in smart beta ETFs that focus on value.

This ETF tracks the MSCI Enhanced Value Europe ETF index which comprises value stocks across 15 countries in Europe including the UK. The stocks are selected looking at the following variables: price-to-book, price/earnings ratios, and cash flow.

(Price to book compares share prices relative to the value of a company’s assets while the price/earnings ratio compares share prices with profitability.)

For a smart beta ETF, the fees are low at 0.25% a year.

Here are the top five sectors in the ETF:

Sector % of ETF
Financial services 18.8
Consumer defensive 13.9
Health 12.0
Industrials 11.7
Consumer Cyclical 10.1

And here’s the recent performance:

2018 2017 2016
-12.9% 13.8% 23.3%

For more ETF ideas, check out Five top Japan ETFs and Five top UK ETFs.

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