Europe. It’s big. And ever since the Great Financial Crisis of 2008, it has dramatically underperformed, as a region, against the US markets. The price ratio shows one of the greatest bear markets of underperformance in history, second only to Emerging Markets which have performed worse.
Perhaps I’m a hopeless romantic, but I still believe in love and cycles where that love goes to undervalued parts of the marketplace. That’s why the Vanguard FTSE Europe ETF (NYSEARCA:VGK) deserves consideration for individuals seeking a low-cost way to gain exposure to a broad basket of European equities. Launched in 2005, VGK uses a passively managed index strategy to track the price performance of a Europe-focused equity index from the FTSE. It’s a big fund with over $26 billion in AUM.
VGK seeks to mimic the performance of the FTSE Developed Europe All Cap Index, a benchmark that tracks the investment returns of the stocks of domestically listed companies in the major European markets. The fund invests in nearly 1,300 stocks across multiple countries, including the economic behemoths of the UK, France, Germany, and Switzerland.
A Look At The Holdings
This fund is incredibly diverse, not just by country but by holdings.
No position makes up more than 3.28% of the fund – something I like a lot, given the risks I’ve flagged in just how concentrated US passive headline averages have become. So we have good weightings here overall. And as to the types of companies here? It runs the gamut. For example, Novo Nordisk is a Danish company that manufactures diabetes care products and drugs intended to assist obese patients in losing weight. ASML Holding N.V. is a Dutch firm which manufactures machines and equipment vital to the production of semiconductors. Nestlé S.A. is a Swiss multinational food and beverage conglomerate. SAP SE, based in Germany, provides enterprise application software and cloud-based solutions.
Nice diversity here. But what about sector and country weights?
Sector Composition and Weightings
Another unique portfolio feature is sector composition: it is dramatically different from that of the S&P 500. Industrials, Financials, and Health Care dominate, while Tech? Not at all.
If you’re bearish on Tech, you may naturally then be bullish on Europe on a relative basis. As to country mix, the UK dominated at the top, with France and Switzerland holding the 2nd and 3rd largest allocations respectively.
Peer Comparison: VGK vs. IEUR
There are a number of Europe-focused ETFs out there. One worth considering is the iShares Core MSCI Europe ETF (IEUR), which follows the MSCI Europe Investable Market Index. When we look at the price ratio of VGK to IEUR, we find that the two funds have been in a relatively tight range with each other. No clear advantage in choosing one over the other.
Pros and Cons
Buying into Europe’s equity market with an ETF like VGK has both upsides and possible downsides, which investors need to bear in mind. On the plus side, European equities trade at considerably better valuations than US stocks. VGK has a P/E ratio of 15.4x and a price-to-book ratio of 2x. This part of the global marketplace simply hasn’t participated in the momentum of US tech, and at some point, there will be some mean reversion.
However, a potential hindrance to investing in European equities is that the region’s economic growth outlook is subdued. It’s also worth remembering that VGK is currency unhedged, meaning that the return on the fund will also depend on the strength or weakness of the dollar against the Pound and the Euro, both of which can result in very different returns than if you hedged out that forex risk.
Conclusion
Overall, I like this fund. VGK is a high-quality way for US investors to diversify a portfolio and gain exposure to hundreds of companies from across Europe, exposing you to some of the world’s greatest companies in a quick way. This is one worth considering, so long as love returns to Europe and turns to scowl for US tech.
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