After a decade of U.S. stock outperformance, it might be Europe’s time to shine. Markets are expecting a rate cut from the European Central Bank, which could boost the region’s stocks. Equity valuations are modest and yields are attractive, although there's risk to principal.
Still, clouds are on the horizon, including the U.K.’s headlong rush into a no-deal Brexit in October. While the MSCI Europe Index rose a hefty 14.46% in the first six months of 2019, performance in the second half of last year was dismal. As a result, over the 12 months ended in June, the index gained a measly 0.13%.
If you believe that your clients’ portfolios need a bit of European dividend seasoning, here are three ETFs that focus on the region. We have eliminated currency-hedged funds as well as those that concentrate on a particular capitalization size or yield level. Each of the following takes a broad view of European stocks:
O’Shares FTSE Europe Quality Dividend ETF (OEUR, expense ratio: 0.48%) holds stocks of more than 150 dividend-paying European companies. The fund, which was launched in August 2015, owns equities that meet certain capitalization, liquidity, quality, volatility, and yield criteria established by index provider FTSE Russell. Weighting is factor based. At the end of June (the fund’s most recent report of country and sector positions), OEUR’s heaviest country bets were in the United Kingdom (29.26%), Switzerland (20.14%) and France (15.91%). Health care was the largest sector weighting at 20.43%, followed by consumer goods at 13.63% and energy at 13.62%. Through July 5, the ETF’s year-to-date return was 13.57%. OEUR’s one-year and three-year annualized returns were 3.36% and 5.13%, respectively. Morningstar sees the ETF’s forward dividend at 4.41%.
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Each of these funds has its own way of adding high-octane assets into clients' portfolios.
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Brexit, worries about trade wars and rising interest rates have prompted a selloff in developed country stocks.
January 16
ProShares MSCI Europe Dividend Growers ETF (EUDV, 0.55%) owns stocks of companies in the MSCI Europe Index that have increased their dividends for at least 10 consecutive years. The ETF, which came public in September 2015, currently holds 34 stocks that are weighted equally. As of July 5, the ETF’s largest country positions were in the U.K. (38.58%), Switzerland (12.12%) and France (11.85%). The biggest sector holdings were in health care (21.23%), consumer staples (20.05%) and industrials (15.10%). Year to date, the ETF has returned 12.62%, with -1.40% for the 12 months ended July 5. Over three years, the portfolio delivered 5.15% annually. EUDY's forward yield is 3.34%, according to Morningstar.
WisdomTree Europe Quality Dividend Growth ETF (EUDG, 0.58%), launched in May 2014, holds 215 dividend-paying European stocks. Despite its title, the fund, based on a proprietary WisdomTree index, does not require its holdings to exhibit dividend growth. The “growth” in the name refers to expected long-term earnings growth. The index judges quality by looking at return on assets and return on equity over a three year period. Stocks are weighted by annual cash dividends paid. As of July 5, EDUG’s largest country positions were in the U.K. (25.57%), France (16.46%) and Switzerland (14.04%). Weightiest sectors were consumer staples (19.86%), industrials (19.32%) and consumer discretionary (19.06%). Through July 5, EUDG’s return for 2019 was 18.10%. For the 12 months through that date, it delivered 3.31%. Annualized three- and five-year returns were 9.42% and 2.37%, respectively. Morningstar projects the ETF’s forward dividend yield at 3.67%.
None of these funds have very long records and all suffered during last year’s downturn in European stocks. Also, EUDV’s small number of holdings may dampen enthusiasm for it. Historically, dividend growth wasn’t a high priority for European companies. In contrast, ProShares’ domestic stock dividend-growth ETFs hold between 52 and 60 issues.
