Are Slow-Growing European ETFs More Desirable Than Fast-Growing Emerging Market ETFs?

by: Gary Gordon

Macro-economic, big picture issues have been dominating investment decision-making for years. For example, due in large part to accelerating GDP in the U.S., domestic markets outperformed world equities from November 2009 to April 2010. However, when U.S. GDP began showing signs of deceleration, double-dip recession fears caused a 15%-plus correction. Investors chose to ignore the strong revenue growth and remarkable profits of U.S. corporations last summer, and instead focused on double-dip uncertainty.

Similarly, the Eurozone’s sovereign debt crisis crippled the region’s ETFs throughout 2010. The governments were ailing, the euro-dollar was plummeting and citizens were marching against austerity measures in the streets. Nobody seemed to care that the corporations themselves were operating smoothly. Once again, the macro-level negatives seemed to outweigh the micro-level positives (e.g., profitability, solid cash reserves, etc.).

Even when we think about emerging market ETF success in 2009 and 2010, what are the most popular reasons that come to mind? The governments are creditor nations with trade surpluses and/or budget surpluses. The middle class consumers have more money to spend. And perhaps ... their countries are growing at 2x-4x the rate of the developed world. It’s rare to read about the robust balance sheets of emerging market companies.

With that said, a shift toward micro-economic factors (i.e., the actual earnings of corporations) may be taking place. Consider the recent run-up in share prices for the following ETFs:

Pursuit Of Bargain Companies Within Slow-Growth Countries?
Approx 1-Month %
iShares MSCI Spain (NYSEARCA:EWP) 15.8%
iShares MSCI Italy (NYSEARCA:EWI) 13.7%
iShares MSCI France (NYSEARCA:EWQ) 9.8%
iShares MSCI Ireland (NYSEARCA:EIRL) 8.1%
iShares MSCI Belgium (NYSEARCA:EWN) 6.3%
Vanguard Emerging Markets (NYSEARCA:VWO) 1.2%

Granted, it’s possible that ... over the last 30 days ... we’re looking at the natural tendency to sell one’s winners and buy some of the losers. Indeed, my first inclination is to avoid reading too much into European share momentum.

Nevertheless, I can’t dismiss the possibility that we’re witnessing a genuine shift toward “value.” Here are current P/E Ratio estimates for the funds mentioned in the chart above:

Do The Current P/E Ratios Suggest a Shift Towards “Value?”
Current P/E (Approx)
iShares MSCI Spain (EWP) 10.6
iShares MSCI Italy (EWI) 14.1
iShares MSCI France (EWQ) 18.4
iShares MSCI Ireland (EIRL) 19.1
iShares MSCI Belgium (NYSEARCA:EWK) 17.4
SPDR S&P 500 (SPY) 19.6
Vanguard Emerging Markets (VWO) 19.4

Have some investors opted to purchase shares of solid companies from slower-growth nations because of a perceived bargain on balance sheets? I’m not one of them. Yet I am inclined to invest more in Germany (NYSEARCA:EWG), Canada (NYSEARCA:EWC) and the good ‘ol U.S. of A. via SPDR S&P 500 (SPY). Emergers may not be able to win the performance battle until the macro-economic fear of inflation dissipates.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.