The lacklustre returns on North American stock exchanges so far this year have prompted more investors to look overseas – and they like what they are finding.
With the year more than one-third over, both New York and Toronto have been uninspiring. The TSX is showing a year-to-date return of just 3.7 per cent. On Wall Street, the S&P 500 has added just 2.8 per cent, while the gain on the Dow is 2.1 per cent. The Nasdaq Composite is the star so far, ahead by 5.8 per cent.
Meanwhile, several overseas markets have been racking up double-digit gains including Paris, Frankfurt, Amsterdam, Hong Kong, and Tokyo. Not surprisingly, more people want to get in on this action and they're asking me for suggestions on where to invest.
For example, Jim B. wrote: "The quantitative easing efforts in Europe hopefully will continue to foster economic growth. The low value of the euro also must help large European corporations' sales to the U.S. in particular. Are there any European ETFs that you could recommend? Especially those that might be underweight European financial institutions."
European markets have been surprisingly strong this year despite the on-going Greek tragedy that could yet end with that country's exit from the euro. European GDP growth is gradually improving and the threat of deflation appears to be receding. Europe is by no means out of the woods, but there are signs of progress and that has encouraged investors.
Canadian ETF providers have only recently zeroed in on Europe as a specific area of interest, having previously lumped it in with the broader EAFE index ETFs (Europe, Australasia, and the Far East). Three Europe-only ETFs were launched in 2014, as follows:
Vanguard FTSE Developed Europe FTSE Index ETF (TSX: VE). This one focuses on large and mid-cap stocks in developed European markets. The largest weightings are in the U.K. (31.1 per cent), France (14.3 per cent), Germany (also 14.3 per cent), and Switzerland (14.2 per cent). Financial stocks are the No. 1 sector at 22.7 per cent followed by consumer goods at 17.8 per cent, health care (12.5 per cent), and industrials (12.4 per cent). Top holdings are Nestle, Novartis, Roche, Royal Dutch Shell, and HSBC. The fund was launched at the end of June last year and was showing a year-to-date gain of 11.5 per cent as of the close on May 5. The MER is a very low 0.23 per cent.
iShares MSCI Europe IMI Index ETF (TSX: XEU). This ETF also zeros in on developed markets but, unlike VE, includes small-cap stocks in the mix. Interestingly, it has the same top five holdings as the Vanguard fund with the exception of Royal Dutch Shell, which is replaced here by BP. The geographic mix is also similar, with the same top four countries and much the same asset allocation. Ditto for the sector breakdown, which has financials at the top at 22.5 per cent. So it shouldn't come as a surprise that the year-to-date performance is almost the same as that of VE at 11.3 per cent. The management fee is 0.25 per cent. There is also a hedged version of this fund, which trades under the symbol XEH. It has a better return so far in 2015, with a gain of 13.9 per cent.
BMO MSCI Europe High Quality Hedged to CAD Index ETF (TSX: ZEQ). The Vanguard and iShares entries are almost twins. This one is a little different and meets our reader's request for a fund with low exposure to financial stocks. It is designed to track the MSCI Europe Quality 100 per cent Hedged to CAD Index, which includes large and mid-cap stocks from developed markets. The emphasis is on stocks with high quality scores based on three main variables: high return on equity (ROE), stable year-over-year earnings growth, and low financial leverage. It's the last variable that limits the fund's exposure to the financial sector to a remarkably low 1.9 per cent. Instead, the emphasis is on consumer staples (31.8 per cent), health care (25.7 per cent), and consumer discretionary (16 per cent). The geographic breakdown is also different from the other two funds. The U.K. at 44.4 per cent and Switzerland at 23.3 per cent are the only two countries in double-digit territory. Germany and France are down around 5 per cent. This fund has the highest management fee of the three at 0.4 per cent and the lowest year-to-date return at 10 per cent.
It's still too early to know which of these funds will be the best performer as all are less than a year old. But as things stand right now, I'd go with either the Vanguard or the iShares entry because of the lower MER and the more balanced geographic allocation.
Another reader is interested in new developments in India. He wrote: "As India is expected to be one of the more successful countries in the emerging markets, what do you think of the iShares Indy 50 ETF?" – Alastair F.
India has been generating a lot of excitement since the election a year ago of Prime Minister Narendra Modi. He pledged to reform government, cut bureaucratic red tape, and open the country to foreign investment. The country's economy has also been helped by the oil price plunge – it is estimated that each drop of $10 (U.S.) in the oil price is worth an extra 0.5 per cent to the country's GDP.
Despite the optimism, India's stock market has been unimpressive. The CNX 50 Index – the "Nifty 50" as it is called – was showing a year-to-date return of -1.1 per cent as of the close of trading on May 8. The initial enthusiasm that followed Mr. Modi's victory appears to have given way to sober second thoughts about the speed of the country's forward progress.
For investors who believe there are better days ahead, here are two Canadian-based ETFs that focus on India.
iShares India Index ETF (TSX: XID). This is the ETF to which our reader is referring. It tracks the performance of India's National Stock Exchange CNX Nifty Index, which covers 22 sectors of the country's economy. The index has a history of high volatility, so investors need to be prepared for a lot of ups and downs. The performance of this ETF reflects that; it lost 35 per cent in 2011, rebounded 24 per cent in 2012, was virtually flat in 2013, and surged 39 per cent in 2014 on the strength of Mr. Modi's election win. So far in 2015 it is showing a small loss of 1.1 per cent. This ETF is simply a Canadian version of the U.S. iShares India 50 ETF (NYSE: INDY) and all its assets are invested in that fund. The MER of XID is 0.98 per cent while that of INDY is 0.94 per cent so there's not much to choose from there. However, the Canadian version has produced much better returns because of currency differentials with a five-year average annual compound rate of return of 5.85 per cent versus only 2.22 per cent for the U.S. fund. Stay at home with this one.
BMO India Equity Index ETF (TSX: ZID). This fund takes a different approach. It tracks the BNY Mellon India Select DR Index. It is comprised of India-domiciled companies that are traded as American and global depositary receipts on the New York Stock Exchange, Amex, Nasdaq, and London Stock Exchange. It is much more concentrated than the iShares funds, with more than half the assets in just four stocks: Infosys, Reliance Industries, HDFC Bank, and Larson & Toubro. This approach has made it a much better performer thus far in 2015 with a year-to-date gain of 5.05 per cent. That's not earth shaking but it's better than the TSX or the S&P 500. Longer-term results are comparable to the iShares fund. The maximum annual management fee is a better value at 0.65 per cent.
Given the choice, I'd go with ZID in this case. I like the more focused approach, although it does entail higher risk, and the lower MER leaves more profit in your pocket.
Ask your financial adviser if any of these ETFs are suitable for you.