Five top Europe ETFs

We are ten years into a bull market and it is becoming harder and harder to find markets or stocks that look cheap.

Even European stocks are not in the bargain basement, but, at first glance, valuations look a lot more reasonable in Europe than in the US. The CAPE ratio for the US was around 30 at the end of April compared to 22 in Europe, according to Barclays. That is a sizeable discount.

Of course, there are explanations for that relative cheapness. European markets do not include stunning success stories like Amazon and Facebook; the eurozone is fragile; there is the continuing conflict between Brussels and Italy, and more besides.

If you are a ‘glass half full’ person and you want to get some exposure to cheaper markets in Europe, here is the lowdown on five top European ETFs.

  1. Xtrackers 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 is not 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 will 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 two later in this list. Around half of the fund is invested in eurozone-listed stocks while UK stocks account for a bit less than a quarter of the ETF. Remember, many of these businesses are large global companies, they are not just operating in their home markets.

Top 5 sectors and countries

Country % of ETF Sector % of ETF
UK 24.0 Financial services 20.5
France 16.5 Consumer Goods 18.6
Switzerland 14.7 Health 13.9
Germany 14.2 Industrials 13.9
Netherlands 7.9 Basic Materials 7.3

Source: DWS, 29 March 2019

Top 5 stocks

Stock % of ETF
Nestle 3.4
Novartis 2.5
Roche 2.1
HSBC 1.8
SAP 1.6

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

Year 2015 2016 2017 2018
Return for year 3.4% 18.5% 15.3% -9.9%

Source: Morningstar, July 9, 2019

  1. iShares Core Euro Stoxx 50 UCITS ETF | CS51 

This ETF is cheaper at 0.1% a year and it’s also the Best Europe Large-Cap Equity ETF in the Elston Top 50 ETFs list for 2019.

The award means that the ETF is very efficient at tracking its index: the Euro Stoxx 50. This index is comprised of the largest stocks in the eurozone, so there’s no exposure to UK-listed stocks or Swiss ones either. Two-thirds of the fund is invested in French and German stocks.

With only 50 stocks, the index is a little narrow, so you’re only getting exposure to the really large mega-caps. If markets are buoyant, you might expect to get slightly better performance from a broader index.

Top countries and sectors for ETF

Country % of ETF Sector % of ETF
France 38.9 Financial services 16.2
Germany 27.7 Consumer Discretionary 13.8
Netherlands 10.1 Industrials 13.0
Spain 9.8 Consumer Staples 11.0
Italy 4.6 Information Technology 10.6

Source: BlackRock, 30 June 2019

Top five stocks 

Stock % of ETF
SAP 5.3
Total 5.2
LVMH 4.0
Linde 3.9
Allianz 3.7

Source: Morningstar, 8 July 2019

Here’s the recent performance for the ETF:

Year 2015 2016 2017 2018
Return for year 0.81% 21.1% 14.5% -10.7%

Source: Morningstar, 9 July 2019

If you want to find out more about the Elston Top 50, look at this free preview.

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

Like the iShares 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.

Top countries and sectors for ETF

Country % of ETF Sector % of ETF
France 23.3 Consumer Goods 20.5
Switzerland 19.8 Financials 20.1
Germany 19.1 Industrials 15.5
Netherlands 7.6 Healthcare 15.1
Spain 6.7 Technology 6.5

Top five stocks 

Stock % of ETF
Nestle 4.8
Novartis 3.0
Roche 2.9
Total 2.1
SAP 1.9

Source: Vanguard 31 May 2019

And here’s the performance:

Year 2015 2016 2017 2018
Return for year 4.9% 19.9% 16.5% -9.7%

Source: Morningstar 30 June 2019

             4. 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 just over a thousand constituents. It has an especially large weighting to the UK, and  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.

Top countries and sectors

Country % of ETF Sector % of ETF
UK 29.6 Financial services 16.2
Germany 10.4 Consumer Discretionary 13.8
Sweden 10.3 Industrials 13.0
Switzerland 8.5 Consumer Staples 11.0
France 6.1 Information Technology 10.6

Source: DWS, 28 June 2019

There’s no point looking at the largest holdings. There’s a large number of stocks bobbing around at roughly 0.5% of the fund.

And here is the recent performance:

Year 2015 2016 2017 2018
Return for year 16.5% 17.6% 23.4% -14.6%

Source: Morningstar 30 June 2019

         5. iShares Edge MSCI Europe Value Factor UCITS ETF (GBP) | IEVL

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.

Top five countries and sectors

Country % of ETF Sector % of ETF
UK 27.5 Financial services 18.0
France 23.2 Consumer staples 14.4
Germany 15.1 Health 13.2
Netherlands 8.4 Industrials 13.1
Switzerland 6.4 Consumer Discretionary 9.0

Top five stocks

Stock % of ETF
British American Tobacco 4.9
Novartis 4.5
Sanofi 3.3
Siemens 3.1
Bayer 3.0

Source: Blackrock, July 10, 2019

And here’s the recent performance:

Year 2016 2017 2018
Annual return 21.1% 14.5% -10.7%

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

This is an updated version of an article first published in 2018. 

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