Don't Sleep On Eurozone ETFs

With the euro stronger against the dollar and the European Central Bank (ECB) dispatching a series of disappointing monetary easing efforts to global investors this year, it is not surprising that Eurozone stocks and the corresponding US-listed exchange traded funds are scuffling.

In the UK (not a member of the Eurozone), there is Brexit risk. Negative interest rates have been employed in other major non-Eurozone economies to, at best, mixed results. The region is also dealing with banking issues, particularly in the eurozone. With woes for some of Germany's big banks to a borderline banking crisis in Italy, the eurozone's third-largest economy, it is not surprising the region's financial services stocks are struggling.

However, the onslaught of negative sentiment endured by Eurozone ETFs could be making the asset class under-appreciated while presenting prescient investors with a buying opportunity. Additionally, Eurozone economic data is not as bad as many U.S. investors think it is.

“Labor markets are improving in countries such as Italy, where reforms appear to be showing results. Many leading economic indicators point to stronger consumption. Also, a major headwind to growth is fading as European fiscal policy shifts from austerity to expansion. Another support: The European Central Bank (ECB) is likely to expand its asset purchases if warranted, rather than lower already-negative rates,” said BlackRock in a recent note. 

The iShares MSCI Eurozone ETF EZU is down 2.1%, which is roughly on par with rival diversified Europe ETFs, including those funds which are not dedicated Eurozone plays. Supporting EZU is a more than 29 percent weight to Germany, which has been posting stellar economic data despite the stronger euro. Germany, the Eurozone's largest economy, is EZU's second-largest country weight.

France, the Eurozone's second-largest economy, is EZU's largest country exposure at 32.2 percent. EZU has also benefited from a relatively low weight of 6.9 percent to troubled Italian stocks. Italy, the Eurozone's third-largest economy, is trying to implement much-needed banking reforms, but some investors are wary of these reforms and how it will take to realize positive benefit from those efforts. 

“Eurozone growth does face longer-term challenges. These include an investment recovery held back by a weak banking system, low corporate confidence and a lack of structural reforms. A worsening immigration crisis and a potential Brexit are near-term risks, but these appear priced into many underperforming European assets. The price-to-book ratio for European equities (as represented by the MSCI Europe Index) is 20 percent below its long-term average, while short sterling positions are increasingly crowded, according to our analysis,” adds BlackRock.

EZU's price-to-earnings ratio is just over 15, which is well below the nearly 19 multiple found on rival S&P 500 ETFs.