The iShares Europe ETF (ASX: IEU) may be one way to gain exposure to the European market and diversify your Australian holdings. Here’s what you should know about this ETF.
What Are ETFs?
Exchange-traded funds, or ASX ETFs, are investment funds that are listed on a stock exchange and provide exposure to a range of shares or assets with a single purchase.
This Rask Finance video explains ETFs:
iShares Europe ETF
The iShares Europe ETF aims to track the performance of the S&P Europe 350 Index, which measures the performance of large-cap companies in 16 developed European markets.
The Europe ETF has over 350 holdings when all companies and cash holdings are considered. Around 26.5% of the companies are based in the UK, and there is also significant exposure to France (17.5%), Switzerland (15.6%) and Germany (13.2%).
The ETF also has smaller exposures to countries such as the Netherlands, Spain, Sweden and Italy. In terms of companies, some of the largest holdings would be familiar to Australian investors, such as Nestle SA (SWX: NESN) and HSBC Holdings Plc (LON: HSBA).
One reason to invest in this European ETF may be the lower valuations. The average price-earnings (P/E) ratio of the holdings is 16.12 times and the average price-to-book-value (P/B) ratio is 1.79 times. Compare this to the iShares S&P 500 ETF (ASX: IVV), where the average P/E ratio is 21 times and the average P/B is 3.35 times.
Over the last ten years, the Europe ETF has returned 6.78% per year including semi-annual dividends. The current 12-month trailing dividend yield is 2.72%.
Fees And Risks
The management fee for the iShares Europe ETF is 0.6% per year, significantly higher than passive ETFs that track the Australian or US markets.
The ETF is diversified across countries and sectors but the usual risks, such as market risk and exchange rate risk, still apply. The Washington Post also reported just last month that there are nine countries currently on the verge of recession, including Germany, the UK and Italy.
My Take
I could see this ETF being appealing if you’re looking to diversify from the Australian or US markets, but the reality over the last five-to-ten years has been lower returns and a higher management fee. In Europe’s current economic state, I’m not rushing to buy this ETF.
I’d rather own our number one ETF pick in the free report below.
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Disclosure: At the time of writing, Max owns shares in the iShares S&P 500 ETF (ASX: IVV).
