Accessing European Equities with ETFs

LOW COST FUNDS: Looking to add to your European equity exposure? Uncertainty surrounding Greece may create buying opportunities - buy on the dips to make gains

Emma Wall 25 June, 2015 | 12:30AM
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Emma Wall: Hello and welcome to the Morningstar Series, Ask the Expert. I am Emma Wall and I am joined today by Morningstar Passive Fund Analyst, Kenneth Lamont.

Kenneth Lamont: Hello, Emma.

Wall: Hi, Kenneth. So I thought today we could talk about Europe. There has been quite a lot of background noise in Europe over the last couple of years, not at least the recent changes with what's going to happen to Greece. And while we would never advocate speculation in kind of market at Morningstar, we prefer people to take a long-term approach to invest.

If you do want to add your European equities exposure, uncertainty creates dips in the market and those dips are a good time to go in. Passives of course are a really efficient way to gain access to the European stock markets. And that's what we are going to talk about today?

Lamont: Yes, yes, so when we talk about Europe it is important that investors understand that there are different types of Europe, let's say, some European exposures include the U.K. and other countries such as Switzerland, whereas others only track the European Monetary Union countries.

Wall: And if you are looking to gain exposure to that growth story it is best just to stick to those pure European stocks and you do have a couple of ETFs in mind for us today. What's the first?

Lamont: Well, the first is the iShares' MSCI EMU. This is a physically replicating fund. It's the most popular in the sector and it exhibited fantastic tracking difference over time and has really tight spreads on the LSE.

Wall: And presumably that's pretty cheap way to access the European equities market as well?

Lamont: Well, yes, the very low TER and it actually over time outperforms its underlying index.

Wall: Pretty impressive. And what's the second today?

Lamont: The second is the UBS MSCI EMU ETF. This charges a slightly lower TER, but has exhibited a similar outperformance over time. The real difference between the two of them is that this is an income producing fund.

Wall: So perhaps one for growth investors and one for income investors?

Lamont: Yes.

Wall: And for investors who perhaps want to take on a little bit more risks, so are okay with a bit of volatility in the market performance you can get an exposure to small companies within Europe. Now, these are more aligned with domestic growth, GDP growth within Europe because more of their revenues are sourced typically from those domestic markets and there is an ETF that gives you exposure to those particular company isn't they?

Lamont: There is. There are several. The one we like is the UBS MSCI EMU Small Cap ETF. Again small caps generally are more sensitive to fluctuations in the business cycle.

Wall: Of course, investors should bear in mind that smaller caps, not just in Europe, all over the world, can have a more volatile performance history. And because of that perhaps is suitable for a smaller portion of your portfolio, a smaller holding than those larger cap exposures that we talked about earlier?

Lamont: Yes.

Wall: Kenneth, thank you very much.

Lamont: Thank you, Emma.

Wall: This Emma Wall for Morningstar. Thank you for watching.


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.

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Emma Wall  is former Senior International Editor for Morningstar