Play Europe With These Small Cap ETFs

The Euro-zone has finally emerged out of its18 month long recession. It now appears that the 17 nation Euro-zone has slowly begun to stabilize.

Euro-zone’s manufacturing sector advanced in August after posting two years of sluggish performance, thanks to surge in factory activity in Italy and Germany. According to MARKIT, manufacturing purchasing managers’ index rose from 50.7 in July to 52 in August.

While the U.K. and Germany are leading the way for the European recovery, much-troubled Greece is also showing some hope. At the same time, manufacturing activity in Austria and France has fallen.

A rebound in China’s economic activity, slow exit of Germany & France from the recession and a revival in the Euro-zone service sector after 19 long months together have been a catalyst for European stocks.

While factors like a rising Euro, increasing unemployment and fiscal tightening still impact the domestic consumption in the region, the outlook for the region looks much more positive now from the longer-term perspective.

Investor Options
Investors who seek to play in Europe can look at some of the small cap ETFs analyzed below.

iShares MSCI United Kingdom Small-Cap (EWUS)

Launched in January 2012, EWUS is a passively managed fund and tracks the MSCI UK Small Cap Index. The product gives investors a broad exposure in U.K. stocks. The product has been ignored by investors as it has amassed only $7.2 million in assets so far.

The fund holds 232 stocks in which the top 10 stocks take a low share of 13.26%. The fund does not put more than 2% share in any of its fund. Mondi Plc, Taylor Wimpley and Asos Plc are the top 3 holdings of the fund.

Consumer Discretionary (25%), Industrials (19.82%) and Financials (19.46%) are the top 3 sectors of the fund. More than 65% share goes to small-cap stocks, while mid-cap and micro-cap take the rest of the share. The fund charge investors 59 bps in fees.

The ETF has given strong returns of 27% as of June 30 on a yearly basis and has a notable dividend yield of 2.87%.

iShares MSCI Germany Small-Cap (EWGS)
Launched in January 2012, EWGS is a passively managed fund and tracks the MSCI Germany Small Cap Index. The product is most suited for investors who seek a broad exposure in German stocks as the fund puts more than 90% of its assets in Germany. The fund has $8.9 million in assets and charge investors 59 bps in fees.

The product holds 107 holdings in its basket. The product is well diversified across individual holdings as it puts nearly 33% securities in its top 10 holdings. Symrise Ag, MTU Aero Engines and Bilfinger are the product’s top 3 holdings. Industrials, Financials and Consumer Discretionary take the top 3 spot in sector holdings, jointly contributing about 59% share.

The ETF has posted solid returns of 28.37% as of June 30 for a one year period and has given a decent yield of 1.83%.

Wisdom Tree Europe Small Cap Dividend (DFE)
Launched in June 2006, DFE tracks the Wisdom Tree Europe Small Cap Dividend Index and gives an overall exposure to European stocks. The fund is a solid choice for investors looking at the trends appearing in Europe. The fund has an asset base if $85.6 million and charge investors 58 bps in fees.

Industrials take the top allocation from a sector look (26%), followed by consumer discretionary (16%) and financials (15%). Country exposure is once again focused on the UK, while Sweden and Italy also receive double digit allocations. Logitech International, Drillisch AG and Holmen AB are the top 3 company holdings of the fund.

The product has given impressive returns of 32% as of June 30 on an annual basis and moreover gives an attractive yield of 3.62%.

The Bottom Line
While an end to Euro-zone recession doesn’t mean that the region will act as a new engine of growth for the global economy anytime in near future, it is a net positive for investment sentiment worldwide.

That said, Europe still has a long way to go as many of the structural issues that have been at the core of the currency union’s recent problems still remain unresolved. But from the longer-term perspective, European stocks and ETFs look attractive as of now as it appears that the worst may be over for the region. Further small cap companies look quite interesting due to their attractive valuation and higher growth potential.

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