It's unlike the British not to get excited over a bargain, but swathes of investors are turning up their noses at European exchange traded funds (ETFs). Equity valuations are at multi-decade lows and there's more room than ever for 'bounce-back'. However, clouded by the uncertainty thrown up by deep-seated structural continental problems, the risks mean this investment opportunity has lost much of its potential appeal.
But not everyone has lost their appetite for Europe. ETF provider iShares reports European ETF take up among UK retail investors has ascended from heavily underweight to neutral since the European Central Bank (ECB) bolstered investor confidence by buying government-issued bonds in August. If you're still sitting on the fence you need to first weigh up your options.
The main European indices are the Euro Stoxx 50, which invests in a selected 50 blue-chip companies in the 12 eurozone countries and the MSCI Europe - a broader index that tracks stocks in the 18 European Union nations.
The MSCI Europe won't offer you a pure continental Europe fund, which you might want because of the stark economic differences between the UK and Europe. Analysts say the UK is more closely aligned to the US than Europe, as it is able to shed workforce quickly in the event of a downturn (like the US), but it still has strong ties to Europe through trading. If you want to exclude the UK, plump for the Euro Stoxx 50, or you can get exposure to it through an ex-UK MSCI fund, such as the iShares MSCI Europe ex-UK Inc (IEUX). But the downside is this fund has a higher than average total expense ratio (TER) of 0.40 per cent.
Should you invest in ETFs with exposure to individual countries? "Not if you're faint-hearted," is the resounding answer from Peter Sleep, senior portfolio manager at Seven Investment Management. He warns going down this road would be little more than risky speculation. If you do want to do it, though, he advises sticking to "safe" nations such as Germany - keeping a close eye on political developments in the ECB so you can get the best prediction of their financial futures. The Amundi ETF MSCI Germany (CG1) invests directly in Germany, with top holdings in Siemens, BASF and Bayer and has a reasonable TER of 0.25 per cent.
A preoccupation with country selection could detract attention away from the sectors being invested in, says Stephen Cohen, head of investment strategies EMEA at iShares. "You ca't forget the country dynamics, but it's more difficult to give sectors proper focus. But Europe is moving more towards sector focus - like the US currently has," he said. Amundi has a range of ETFs that allow you to track sectors across Europe, including the Amundi ETF MSCI Europe Consumer Staples (SC5) and Amundi ETF MSCI Europe Industrials (AIND), which both have reasonable TERs of 0.25 per cent.
TERs are commonly very cheap for European ETFs - but beware as this could be deceiving as it doesn't always translate to better value for money. Some European ETFs come with TERs of 0 per cent such as the db x-trackers Euro STOXX 50 ETF 1D (XESX), which at first glance appears extraordinarily low-cost.
Don't be fooled, though. Even though European companies such as Siemens, for example, can have a high payout ratio, withholding tax means you will only see 75 per cent of the dividend - because your fund only has to pass on to you the net total return, pocketing a sizeable chunk for itself. Mr Sleep says this so-called "dividend arbitrage" is how the funds make money and why, if a fund performs well, it can offer a "0 per cent fee". Lyxor recently cut TERs on all its ETFs last week due to pricing pressures; it has reduced the total expense ratio by 5 basis points on seven core ETFs, bringing the cost of the Lyxor Euro Stoxx 50 ETF down to 20 basis points (bps). TERs are usually priced between 10 and 20 bps, and peak at around 35-40 bps.
Europe ETF investment checklist
■ Consider excluding the UK because it is not economically aligned to Europe
■ Only invest in individual countries if you have a high-risk appetite
■ Don't forget about sectors
■ Ensure your fund has UK reporting status
■ Remember to opt for distributing funds if you want dividend payments as accumulation funds/shares won't pay these.
Suggested European ETFs
|Amundi ETF MSCI EMU (GBP)||0.25|
|ETF MSCI Europe Industrials||0.25|
|Amundi ETF MSCI Europe Consumer Staples (GBP)||0.25|
|Lyxor Euro Stoxx 50 ETF (GBP)||0.20|
|iShares MSCI Europe ex-UK Inc||0.40|
|Amundi ETF MSCI Germany||0.25|
|Source: Investors Chronicle|
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