Can The Higher Trend Continue For European ETFs?

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August 26, 2013 3:50pm NYSE:EWI NYSE:EWK

europeFor much of 2013, European shares lagged the markets of other developed nations. Shares in Europe were rangebound while their counterparts in the U.S, Japan, and elsewhere saw soaring asset prices.

However, the further we have gone into summer, the better it has looked for Europe. The continent is seeing many of its top markets rebound strongly, while so-called ‘PIIGS’ nations have seen a reversal too.

The perception regarding the continent is starting the change, the euro currency is looking more firm, and growth rates are actually starting to pick up as well. In fact, the euro zone recently saw preliminary GDP growth figures beat estimates and come in at 0.3% for the second quarter over the first. While this might not sound like a lot, it does end an 18-month contraction, and could herald a new era of growth for the region.

This shift may even lead to some much needed job growth on the continent, hopefully creating a ‘virtuous cycle’ in a number of key markets that have been beaten down over the past few months (see all the European Equity ETFs).

Top Performers

Given this changing perception, some of the worst performing markets in years past have led on the upswing over the past month. These markets, while still uncertain for the long-term, may have some more room to run from a momentum perspective, and could be worth a closer look for those seeking European investments in the short run.

Below, we highlight four country ETFs from the region that have been among the top performers in Europe. This group has managed to turn it around lately and all four are beating out both the S&P 500, as well as broad European ETFs like (VGK) and (EZU), over the past one month time frame:

iShares MSCI Italy Capped ETF (EWI)

While the perception might not be too favorable for the Italian economy, the country has come back strong in recent weeks. One way to play this trend is with EWI, an ETF that follows the MSCI Italy 25/50 Index, holding roughly two dozen Italian firms in its basket.

The portfolio is a bit focused from a sector perspective, with financials (32%), energy (25%), and industrials (15%), taking the three biggest spots. The fund also has a large cap focus, while Eni takes the top spot at nearly 20% of the portfolio (see Bet on the Euro with these 3 ETFs).

EWI is just barely break even over the past three months, posting a 0.6% gain, though its performance in the past one month has been quite solid at 6.9%.

iShares MSCI Belgium Capped ETF (EWK)

To target the often overlooked market of Belgium, investors have this ETF from iShares. The product tracks the MSCI Belgium IMI 25/50 Index, giving exposure to about 43 companies in the Belgian market.

The product does have some concentration issues though, as Anheuser-Busch accounts for 21.6% of the portfolio on its own. Beyond that, financial services, food retail, and commodity chemicals make up big chunks of this large cap focused ETF.

Over the past three months, EWK has seen a solid gain of 4.9%. Most of the gains were in the past month though as the trailing 30 days saw gains of 5.9%.

iShares MSCI Austria Capped ETF (EWO)

Another overlooked market, though one that has significant Eastern European exposure, is Austria. Investors can target this nation with EWO, a product that has about 27 stocks in its basket, and charges investors 50 basis points a year in fees (see 3 Forgotten Ways to Play Europe with ETFs).

Large caps make up just under two-thirds of the assets, while sectors are focused on financials, industrials and energy. Like other funds on the list, EWO is a bit concentrated with Erste Group and OMV combining to make up nearly one-fourth of the portfolio.

Over the past three months, this Austrian ETF has added 2.7%, a respectable figure. However, the gains in the past month have been especially solid, as these come in at 8.7%.

iShares MSCI Spain Capped ETF (EWP)

The best performer on this list comes to us from Spain. The country can be targeted with EWP, an ETF that holds two dozen Spanish companies, charging investors 50 basis points a year for the exposure.

Large caps make up about 75% of the assets in this product, but the real item to note is that financials make up 44% of assets, including two of the top three holdings. These high beta securities are likely what helped EWP outperform lately, and especially thanks to Banco Santander and BBVA which, along with Telefonica, account for 44.7% of assets on their own.

EWP has been a solid performer in the trailing three month time frame, adding about 4.8% in the period. The real surge has taken place in the past four weeks though, as in this time period, EWP has moved higher by 9.9%.

Bottom Line

Despite some sluggish trading earlier in the year, European markets have come back strong in recent weeks. Funds tracking these nations have outperformed many other developed market counterparts as a firmer euro and a return to growth have rekindled investor interest in the region (see High Dividend ETFs to Buy Even If the Fed Tapers).

Whether this trend can continue over the long haul is another question, as all the nations highlighted have some structural issues that they still need to work out, so these might not be the best picks for long term investors.

Still, if current trends can remain in place,  these four may continue to see a solid bounce back to close out the summer, especially if optimism continues over the new European growth story.

This article is brought to you courtesy of Eric Dutram.

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