A Europe ETF Defying The Odds

Global investors have generally displayed disappointment with the European Central Bank's efforts to stimulate the Eurozone economy through a massive quantitative easing scheme and negative interest rates.

Add to that, there has been lingering concern about Great Britain's fate in the Europe Union with the so called Brexit vote coming up on June 23. The bottom line is it's not surprising that investors are not embracing dedicated Eurozone exchange traded funds or diversified Europe ETFs that often feature significant exposure to Eurozone and U.K. equities.

Here is a dichotomy. Global small-caps are performing admirably. The WisdomTree Europe SmallCap Dividend Fund DFE is an example of a Europe ETF that is defying some unfavorable trends. DFE is down 3.5 percent year-to-date. That sounds bad, but it is far better than what investors have been treated to with diversified, large-cap Europe ETFs. The Vanguard Europe ETF VGK and the iShares Europe ETF IEV are down an average of 5.3 percent this year.

DFE has also been less volatile than those ETFs this year.

“US investors have been most eager to sell out of Eurozone exposed ETFs as outflows out of US domiciled funds have started much earlier and have been more consistent than their European listed peers. The last six months have seen US withdrawals sell off an average of €1.5bn of Eurozone equity exposure per month, twice the pace of European listed funds,” according to Markit.

Markit data indicate assets under management at Europe ETFs have fallen by a fifth since hitting all-time highs in the fourth quarter of 2015. DFE has not succumbed to that fate. Year-to-date, DFE has hauled in over $121 million in new assets while VGK has bled over $1 billion.

DFE is not a dedicated Eurozone ETF as the fund devotes nearly 39 percent of its combined weight to U.K. and Swedish stocks, so there is some Brexit risk with the fund. When factoring in DFE's more than 20 percent combined weight to Swedish, Danish and Swiss stocks along with the ETF's heavy Eurozone exposure, DFE is heavily allocated to countries with negative interest rates.

In fact, DFE is the ideal tonic for dealing with Europe's array of negative interest rate countries. The DFE's fundamentally-weighted index yields nearly 3.7 percent while trading at an earnings multiple that is slightly below that of the S&P 500.