Thanks to reduced debt worries, strong growth in some of the key members and solid data, the European economy has nicely rebounded over the past couple of months. Though the Euro zone emerged from a long 18-month recession, the growth seems fragile and closer to a standstill.
This is because the Euro zone economy grew just 0.1% in the third quarter compared to 0.3% in the second. The biggest European economy – Germany – is showing signs of a slowdown while economic growth in France surprisingly contracted in the third quarter. Italy continued to shrink and entered into the third year of recession.
Further, tumbling inflation and higher unemployment is stalling the burgeoning Euro zone economic recovery. Inflation dropped well below the 2% annual target to 0.7% in October while unemployment remained at a record high of 12.2%.
In order to support growth in the Euro zone, the European Central Bank (ECB) recently cut its benchmark rate to a record low of 0.25%. If that wasn’t enough, the ECB might introduce a negative deposit rate as and when required too (read:Euro ETFs in Focus After Surprise ECB Rate Cut).
According to Bloomberg, the rate for commercial lenders could fall to -0.1% from the current zero level. This would be the first time that the central bank adjusts rates by less than a quarter percentage point. This measure will likely increase lending and boost inflation closer to the target rate.
Based on the improving fundamentals, European stocks have moved back on track lately and the related ETFs are seeing huge fund inflows. For investors interested to participate in the recovery, a focus on top ranked Europe ETFs could be a less risky way to tap the same broad trends.
These products offer exposure to the broad European economy rather than a particular nation and thus may be better picks at this time for some investors.
Top Ranked European ETF in Focus
We have found a number of ETFs that have the top Zacks ETF Rank of 1 or ‘Strong Buy’ rating in the broad European space and are thus expected to outperform in the months to come.
While all these top ranked ETFs are likely to outperform, the following three could be good choices to tap into the space. This trio has enjoyed a strong momentum in the year-to-date period, and al have potentially superior weighting methodologies which could allow for these to continue leading the European space in the months ahead.
First Trust Europe AlphaDEX Fund (NYSEARCA:FEP)
This fund provides a slightly active choice as it uses the AlphaDEX methodology to select the stocks. The methodology seeks to narrow the European space to only the best positioned companies. It ranks the stocks by various growth and value factors, eliminating the bottom ranked 25% of the stocks.
This approach produces a basket of 201 stocks, which is widely spread across various nations and securities as each security holds less than 1% of assets. France (18.62%), United Kingdom (17.16%) and Germany (11.38%) occupy the top three positions in terms of country exposure. However, the product is tilted toward financial sector at 21.35%, closely followed by industrials (17.72%) and consumer discretionary (17.41%).
The fund has gathered more than $237 million of assets this year, propelling the total base to $283.5 million. The product trades in good volume of nearly 94,000 shares per day while it charges a bit higher 80 bps in annual fees. The ETF returned over 23.5% in the year-to-date time frame.
SPDR STOXX Europe 50 ETF (NYSEARCA:FEU)
This fund follows the STOXX Europe 50 Index, which measures the performance of some of the largest companies across the components of the 20 EURO STOXX Supersector Indexes. The fund appears rich with AUM of nearly $148 million, out of which $92 million was pulled in this year. The ETF charges 29 bps in fees per year from investors while volume is light.