3 Top Rated European ETFs

Political and economic news from Europe is looking more upbeat, ahead of planned Brexit negotiations. We reveal three top-performing and low-cost European ETFs 

Karen Kwok 16 June, 2017 | 1:13PM

The outlook for Europe is looking more positive, and this is reflected in the performance of exchange traded fund that track the main European indices.

European equity ETFs are the best performing funds this year to date, out of 149 top-rated ETFs by Morningstar analysts. This is perhaps not surprising given the Euro Stoxx 50 is up by 6.8% so far this year.

With Brexit talks scheduled to start this week, Europe is enjoying more favourable economic and political conditions. In contrast to the UK’s political instability, France’s President Emmanuel Macron is expected to win a clear majority in the second round of his country’s parliamentary elections  – which will be held this Sunday.

European investors will also be cheered by more positive progress on the next stage of the £86 billion bailout for Greece – a problem which has dogged the economic prospects of the region for years.

As part of the deal allowing the disbursement of the new bailout, the International Monetary Fund will also come on board for the programme - a key demand made  by Germany. However, the fund will not disburse money unless European creditors identify debt relief measures.

“There is now light at the end of the tunnel,” said Greek Finance Minister Euclid Tsakalotos.

Using Morningstar Direct, we list three top-rated and best performing ETFs.

Lyxor MSCI Europe ETF (JC5)

The Lyxor MSCI Europe ETF, which is Silver Rated by Morningstar analysts, has returned 13.5% over the year to date. The synthetically replicated Lyxor MSCI Europe ETF has outperformed its benchmark over the past three years, and is one of the top-performing MSCI Europe ETFs, according to Dimitar Boyadzhiev, passive analyst with Morningstar.

The fund had 10.3% annualised returns over a three-year period and has returned 15% over five years.

Boyadzhiev  said: “The fund has shown above-average risk-adjusted performance over three, five, and 10-year periods when compared with peers in the category, which includes actively managed funds.”

The fund’s portfolio aims to represent approximately 85% of the European developed equity market. By construction, in comparison with other passive and active offerings in the Europe Large Cap Blend Morningstar Category, MSCI Europe will always have a slight overweighting in larger companies at the expense of medium-size and small companies, said Boyadzhiev. However, the ETF stands as a good representation of the investment opportunities available, with a well-balanced sector and geography composition, Boyadzhiev added.

“At 0.28%, the fund’s ongoing charge is much lower than the median fee level of 1.77% for the category; however, it is averagely priced in comparison with the other exchange-traded funds available,” said Boyadzhiev.

The MSCI Europe Index includes approximately 85% of the equity market capitalisation of 15 countries across developed Europe. Financial services and consumer defensive are the index’s biggest sectors, with a 15%-20% weighting each, followed by healthcare and industrials.

iShares Core MSCI Europe ETF (IEUR)

This ETF is Gold Rated by Morningstar analysts. The fund gained 12.2% over the year to date, and has returned 10.2% over three. It is a US-domiciled ETF so UK investors should bear in mind that investing in ETFs domiciled in the US is not tax efficient.

IShares Core MSCI Europe IEUR is one of the cheapest and best-diversified funds in the Europe stock Morningstar Category, said Alex Bryan, passive analyst with Morningstar.

The fund targets stocks listed in developed European countries, representing the largest 99% of the investable market. This sweeps in more than 900 holdings, effectively diversifying firm-specific risk. It weights these stocks by market capitalization, which promotes low turnover. This approach also reflects the market's collective view about the relative value of each holding and skews the portfolio toward the largest European stocks, said Bryan.

“Since it was only launched in June 2014, the fund has a limited record, but its cost advantage should give it an edge over the long term.” However Bryan points out that over the past 10 years the fund’s index has slightly lagged the average return from its mutual fund peers – by 9 basis point, on an annualised basis He adds: “So far, this ETF has kept tracking error low, even though it does not fully replicate the index,” said Bryan.

Vanguard FTSE Europe Index fund ETF Shares (VGK)

The Vanguard FTSE Europe Index fund ETF Shares is Silver Rated by Morningstar analysts. It gained 12.4% year to date and it returned 10% over three years and 14.3% over five years. It is also a US-domiciled ETF so UK investors should bear in mind that investing in ETFs domiciled in the US is not tax efficient.

Like other ETFs in this sector this Vanguard fund offers low cost access to a diversified range of European stocks. However, the fund's performance does not stand out from its category peers, said Daniel Sotiroff, passive analyst with Morningstar.

The fund transitioned to the FTSE Developed Europe All Cap Index from the FTSE Developed Europe Index in October 2015, which extended its reach to include small-cap stocks. This well-diversified portfolio includes over 1,100 stocks listed in 15 developed European countries, covering 98% of the investable market. The fund currently only parks 16% of its assets in its top 10 holdings, said Sotiroff.

“Vanguard recently cut the fund's expense ratio to 10 basis points from 12, making it one of the cheapest funds in its Morningstar Category. However. its tracking error appears a little high over the trailing 12 months through March 2017. This is partially due to fair value pricing and deviations between the portfolio and the index that may occur because of differences in transaction timing as the managers seek to mitigate transaction costs. Over long periods these small differences should wash out,” said Sotiroff.  

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
iShares Core MSCI Europe46.17 USD-0.12
Lyxor MSCI Europe ETF USD A/I  
Vanguard FTSE Europe ETF54.53 USD0.02

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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