ETF Issuers Still Favor Euro Zone: Two European Funds Planned

Europe is again troubled by a slowdown and deflation, with Ukrainian worries and the Russian food import ban raising questions over the sustainability of the European Union’s growth momentum. Fresh banking woes are an added bother, but seemingly not for the fund issuers.

The European Central Bank President Mario Draghi’s ultra-easy monetary policy and steps to introduce negative deposit rate in the Euro zone actually kept hopes for the European stocks alive and spurred the much-needed optimism in fund issuers’ minds.

Probably getting carried away by his easy money policies, First Trust and ALPS recently planned Europe-based ETFs recently. Let’s discuss the proposed funds in greater detail below (read: Negative Interest Rates Put These European ETFs in Focus):

Proposed First Trust fund in Focus

The First Trust Eurozone AlphaDEX ETF will follow a smart-beta approach by tracking the Nasdaq AlphaDEX Eurozone Index. The methodology looks to eliminate some of the lowest ranked stocks from the benchmark while giving higher weighting to firms that achieve top ratings.

First, all the component stocks in a benchmark are ranked separately on both growth and value factors. Normally, the top fifty ranked stocks in the benchmark are then divided into quintiles and each equity is ranked equally within each quintile with more assets going toward top rated groups.

Proposed ALPS fund in Focus

The fund was planned late last month. The ALPS Stoxx Europe 600 ETF looks to track the Stoxx Europe Total Market Index which is market-cap weighted and exposed to 600 largest developed-market stocks of the Stoxx Europe Total Market Index.

The index includes stocks from developed markets countries like Austria, Belgium and Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands and the U.K.

How Do They Fit in a Portfolio?

The products could be intriguing options for investors seeking broad exposure to the Europe space. No doubt the continent is presently going through a lean patch. Still, investors should not forget that the continent emerged out of a prolonged recession just about a year back.

Hence, this much turbulence seems warranted given the early phase of recovery and relentless geo-political concerns. An ultra-low interest rate environment and scope for further monetary easing leave room for the continent’s stock markets to soar (read: 3 European ETFs to Buy After ECB Action).

Can They Succeed?

European ETF space is practically overcrowded, so it could be difficult for the proposed funds to build up assets, if either of the duo gets approval. The space is presently topped by FTSE Europe ETF (VGK) which has amassed about $15.4 billion in assets.

iShares MSCI EMU Index Fund (EZU) and SPDR DJ EURO STOXX 50 ETF (FEZ) are the next two position holders with a respective $8.8 billion and $5.3 billion in assets (read: 2 Great European ETFs to Buy in an Uncertain Market).

The trio has an expense ratio of 98 bps, 82 bps and 92 bps respectively. So, to win the game, the newly launched products need to charge competitive expense ratios. Also, dividend yields are decent in the top three Europe ETFs which stands at 4.12%, 2.45% and 3.29% respectively (as of August 11, 2014).

The low interest rates in Europe should bolster the appeal for dividend investing. Thus, it would be an added advantage for the planned funds if the stocks chosen in it offer substantial yields to investors.

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