Positioning For A Rebound In European ETFs

Major European equity benchmarks are on multiday losing skids after catching the downdraft affecting U.S. stocks, but that does not mean investors should give up on Europe exchange traded funds. Some market observers believe Europe is retaining its hero status among developed market stocks.

That could bode well for a rebound in the iShares Core MSCI Europe ETF IEUR and rival U.S.-listed Europe ETFs. In the case of the $2.85-billion iShares Core MSCI Europe ETF, that fund is down about 5.5 percent over the past week, a disappointing display after the fund surged 26.7 percent last year.

“Within developed markets, there’s an unsung hero in the global economy’s recent performance: Europe,” said BlackRock in a recent note. “The strength of Europe’s rebound in 2017 was one of the year’s biggest macro surprises, with gross domestic product growth reaching a robust, nearly 3-percent annual rate.”

What Drives IEUR

IEUR tracks the MSCI Europe Investable Market Index, providing investors with diversified exposure to European equities to the tune of 1,015 holdings. The fund features exposure to more than a dozen countries, but IEUR is not a dedicated Eurozone ETF.

The U.K. and Switzerland are two of IEUR's four-largest country weights. Those two countries combine for 39.5 percent of the ETF's geographic weight. France and Germany, the Eurozone's two largest economies, combine for 30.4 percent of the fund's weight. Overall, seven of the countries represented in IEUR are Eurozone nations. That is an important trait, with the Eurozone forecast to be an important driver of global economic growth this year.

“Yet over the past two years, Europe has proved the only constant source of growth support, though all regions were contributing to growth by 2017, reflecting the synchronized nature of the expansion,” said BlackRock. “We expect Europe to be another solid contributor in 2018, with bigger investment helping solidify the pace of growth and a further rebound in borrowing and lending giving the eurozone expansion more room to run.”

Cyclical Exposure

At this point in the European recovery, it would be reasonable to expect cyclical sectors to contribute to the rally. IEUR is positioned for such a scenario: financial services, industrial and consumer discretionary stocks combine for over 46 percent of the ETF's roster. There is some defensive positioning as well, with consumer staples and health care names combining for 23.5 percent of IEUR's sector weight.

“Corporate investment is a key channel for these spillovers, and we expect a further business investment upswing thanks to U.S. fiscal stimulus and Europe’s recovery,” BlackRock said.

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