Advisers say don't let Greece put you off ETFs in Europe. The country does not appear in many of the largest European ETFs and, according to Adam Laird, head of passive investing at Hargreaves Lansdown: "Greece represents a small part of the European equity market so European company fundamentals haven't changed much during this crisis."
"We think Europe has looked like good value for a while now," he adds. When it comes to tracking down (and tracking) areas of Europe that look like good value opportunities, you could look at a value-tilted ETF or specific country ETFs.
Where should you start the hunt? "Resources and finance are the sectors that have been most depressed recently, but would be beneficiaries of a recovering economy - and higher interest rates in the case of banks," says David Liddell, chief executive at IpsoFacto Investor.
Alan Miller, founder of SCM Private, says investors should avoid the "high-quality stocks which are exceedingly, though maybe reassuringly, expensive" often found in minimum volatility ETFs and look instead at indices with small-cap and consumer cyclical exposure.
Based on the price-earnings-to-growth ratio of underlying assets, he says the best value ETFs are the iShares MSCI EMU Small Cap (CES1) and IC Top 50 ETF Wisdomtree Europe Small Cap Dividend (DFE). DFE tracks the small-cap segment of the European market and weights assets by the total dividend paid and two of its largest holdings are Swiss bank Cembra Money Bank AG and private equity firm Ratos AB B. Smaller companies can outperform in the long term and, although it is a fairly new ETF, performance so far has been strong.
Smart approaches - using value indices
An obvious place to look for ETFs targeting European value is at the range of value-orientated beta products. These use a range of rule-based criteria to track a selection of stocks from a European index. But be aware that there are big differences in the ways providers define value.
Ben Seager-Scott, director of investment strategy at Tilney Bestinvest, says: "Value tilts are an interesting area, but increasingly you have to be an indexation expert. You need to understand how the rules affect what goes into the index."
In general, value indices tend to have far higher exposures to financials, telecoms and oil and gas stocks than broader European indices, which are concentrated in healthcare and consumer staples, but every index uses different metrics and comes out with different results.
Christopher Aldous, managing director at Charles Stanley Pan Asset, highlights IC Top 50 ETF iShares MSCI Europe Value Factor UCITS ETF (IEFV) and iShares EURO Total Market Value Large UCITS ETF (IDJV).
The MSCI Europe Enhanced Value Index, tracked by iShares' value factor ETF (IEFV) and Euro Stoxx Total Market Value Large Index, tracked by IDJV, both look at a range of value criteria including price-earnings and price-to-book ratios. But there are differences. For example iShares value factor ETF has a 30 per cent exposure to the UK, while iShares EURO ETF has none, meaning UK investors with a high proportion of their portfolio already in the UK might end up doubling up.
Mr Liddell puts forward UCITS ETF and UBS ETF (LU) MSCI EMU Value UCITS ETF, which tracks a different index again. It also has no weighting to the UK but a much higher exposure to financials - at 30 per cent - than either iShares product. Mr Seager-Scott says the iShares MSCI Europe Value Factor, could be a good idea for those less convinced by the financials argument but still keen to track value stocks.
Targeting countries
Another, high-risk approach to Europe ETF investing is to target specific countries. Germany and Italy are the top picks among advisers and wealth managers.
Mr Aldous and Shaun Port, chief investment officer at Nutmeg, both like the German stock market (the DAX), with Mr Port combining it with an Italian ETF as a way of combining very different risk profiles.
Mr Aldous says: "If I was looking to pick value I'd look at the DAX, which has been badly hit over the past month or so. Germany is one of the biggest, most liquid markets and is where marginal money will flow." He recommends the new Wisdomtree Germany Equity UCITS ETF GBP hedged (DXGP), which also offers currency protection to UK investors.
Mr Port says: "We've used a barbell (a balance of stocks with different characteristics to create a balance) of the Dax and Italy in the past.
"Italy versus other peripheral markets have underperformed and if you want to take a play on the European recovery with more punch then Italy is a good place to go because it offers concentrated exposure but through a very liquid ETF as well as being a good proxy for peripheral Europe."
He points to iShares FTSE MIB UCITS ETF Income (IMIB), which Adam Laird, passive investment manager at Hargreaves Lansdown says is one of the most popular Italian products.
How risky is this strategy?
Looking for cheap and unloved European sectors via an ETF is a higher-risk strategy than investing in one of the broader ETFs tracking indices such as the FTSE Developed Europe ex UK or Euro Stoxx 50 and many advisers are wary of it.
Mr Seager-Scott says: "Value-tilted indices can be much more volatile. A lot of valuation metrics will give heavy exposure to financials. When a market sells off, banks will be at the front end of that, although equally if there is a rally banks can also be at the forefront."
Mr Port says: "We're wary of value styles, our strategy is much more growth orientated and to look at plain vanilla large-cap global growth-style stocks."
He suggests a broader European ETF such as UBS ETF MSCI EMU Hedged to GBP UCITS ETF (UC60), which gives currency protection against a falling euro. Mr Laird's core suggestions include the Vanguard FTSE Developed Europe ex UK (VERX). He says a good index for more concentrated exposure is the Euro Stoxx 50, which Mr Seager-Scott says could benefit from QE liquidity. That is tracked by ETFs such as db-x trackers Euro Stoxx 50 UCITS ETF (DR) 1C and iShares Euro Stoxx 50 UCITS ETF (CS51) and the iShares Euro Stoxx 50 UCITS ETF Ex Financials UCITS ETF (EXFN).
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