IEUR ETF: Not The Most Opportune Time To Pursue This Average Product

seekingalpha07-13

NicoElNino YTD Performance The iShares Core MSCI Europe ETF (NYSEARCA:IEUR), a passively managed ETF that provides exposure to equities from the developed markets of Europe, has not enjoyed the best ...

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on a YTD basis, it has managed to generate positive returns of high-single-digits, but that return threshold has only been half as good as what US markets have seen. Even a diversified pool of global stocks has generated returns that are around 500bps more than IEUR. YCharts Regardless of its middling performance this year, here are a few important considerations for those looking to initiate a position in this ETF. IEUR's Qualities In Relation to Its Largest Peer The Vanguard FTSE Europe ETF (VGK) is widely perceived to be the gold-standard ETF within the European diversified equity ETF space. Measuring IEUR against this behemoth would help provide some perspective on where our focus ETF stands. Seeking Alpha, Morningstar As far as the listing history is concerned, note that VGK had gained a head start of almost a decade's worth of existence relative to IEUR (listed only around 10 years back, in June 2014), and this has helped it amass massive AUM to the tune of +$25bn; this translates to over 5x the AUM that IEUR has accumulated as a listed product. VGK has a slight edge when it comes to efficiency and stability, as its expense ratio is 2bps lower, and its turnover ratio is 100bps lower than IEUR. Investors may also appreciate the marginally better income profile of VGK although IEUR has been doing its best to catch up in recent years. Currently, VGK offers a slightly higher yield of 3.1% vs. 3.01% for IEUR, but note that in recent years IEUR has been growing its dividends at a faster pace (3-year CAGR of 8.6% vs. 7.8% for VGK). From an absolute and risk-adjusted returns perspective, it's not easy to split the two products. YCharts Since IEUR's debut on the markets, there's been a tug of war between the two products in terms of outperformance rankings, but as things stand, our focus ETF just about enjoys a slender lead. However, looking at just total returns won't necessarily give you a holistic perspective as it does not consider the level of risk these products employ. For that, we need to consider the Sharpe ratio (looks at excess return capabilities in light of the standard deviation of the product) and the Sortino ratio (looks at excess return capabilities in light of the downside deviation involved). The chart below highlights how IEUR comes up short vs. VGK when these risk-adjusted measures are brought into play. YCharts What's interesting to note is that even though both ETFs track two different indices (IEUR tracks the MSCI Europe IMI, whilst VGK tracks the FTSE Developed Europe All Cap Index), there's a lot of similarity in the texture of their respective holdings (although VGK covers a much wider pool of names; nearly 1300 stocks, as opposed to a little over 1000 stocks for IEUR). Firstly, both ETFs cover stocks encompassing near-identical geographic regions across Europe with both having similar exposure to the likes of the UK, France, Switzerland, Germany, and Netherlands which make up the top 5 regions. VGK's wider pool of stocks comes from some of the peripheral regions such as Portugal, Ireland, etc. where the banking sector at least appears to be in better shape. Banks there are believed to have a great proportion of variable-rate loans and have also benefitted from lower valuations. Separately, it must also be noted that both ETFs are paying the price for not dabbling with Greece. The lack of Greek exposure is unfortunate, as the Greek economy has served as one of the most improved economic stories over the last few years, and this has been reflected in the performance of the Global X MSCI Greece ETF (GREK), which has ended up delivering returns of 63% over the past 3 years (over 5x the return threshold of IEUR). YCharts Looking ahead, it is encouraging to note the strong exposure to the UK region (for both ETFs, UK stocks account for almost a fourth of the total holdings) as growth expectations are getting revised to the upside. Recently in May (three-month time frame) we've seen the economy expand by 0.9%, above consensus expectations of 0.7%, and prompting FY24 GDP expectations to be revised upwards to 1.2% from 1.1% previously. Crucially under the new Labor government (they now have 412 seats within the 650-seat House of Commons) that came to power amidst a landslide victory, one can expect compelling economic reforms, including a new industrial policy. From a market-cap perspective, note that both IEUR and VGK tilt very heavily to large-caps (78% for IEUR and 77% for VGK) and have equal exposure to mid-caps (17% for both) so this hasn't really been a key differentiator. From a sectoral perspective, we don't see any overexposure to any particular sector, but the financial sector is the top sector for both products at around 18%. Given that most of the banks of IEUR are based in some of the more developed markets of Germany, France, etc. it's worth considering that they could benefit as the rate cycle reverses (the ECB is expected to cut rates a couple more times this year) and shifts lower. This is so, because the loans on their books are fixed-rate loans, which will continue to be locked in at higher rates, and they could also benefit from falling deposit rates. Closing Thoughts: Valuation and Technical Commentary IEUR's valuations are not overly pricey, but one also ought to question if one is getting solid enough earnings growth at the stated P/E multiple. As per Morningstar data, IEUR's P/E valuation currently works out to 13.43x, which is almost on par with the corresponding multiple of the FTSE Developed Markets portfolio. Yet, note that the latter's holdings are poised to deliver double-digit long-term earnings whereas IEUR's holdings will likely see earnings growth of 8.6%. Investing Finally, if we look at IEUR's long-term monthly chart, note that the price imprints are captured within the two black lines (which is essentially an ascending channel), and currently the price is a long way from the lower boundary of the channel. Meanwhile, we also have an intermediate uptrend, and even here the price is still a long way from the trendline support (the red line). Investors may also want to note that the ETF has now come to a congestion zone (area highlighted in yellow), which previously served as a stumbling block in the second half of 2021 and early 2022. IEUR may break away from here, but given its history around this terrain, it wouldn't be too wise to turn bullish here.  All things considered, IEUR is a HOLD at current levels.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2451561429"}