Ongoing policy easing and hopes for further stimulus have put the spotlight on European stocks and their related ETFs.
Recently, one of the renowned ETF issuers, First Trust, introduced a product in the U.S. targeting Europe. The launched product - the First Trust RiverFront Dynamic Europe ETF (NASDAQ:RFEU) - hit the market on April 13. Below, we highlight the product in detail:
RFEU in Focus
The fund provides exposure to European companies through investments in common stock, depositary receipts and real estate investment trusts, and forward foreign currency exchange contracts. It is an actively managed fund and does not track any index. The fund employs a dynamic currency hedging strategy by using forward foreign currency exchange contracts and currency spot transactions to hedge the fund's currency exposure either partially or fully.
RiverFront is the sub-advisor to the fund and is responsible for managing the portfolio. The fund advisor will perform top-down analysis of liquidity, investability and data availability to narrow the investable universe down to roughly fifty specific country and regional geographic markets. Then, on the basis of both quantitative and qualitative factors, stocks are selected.
RFEU is a well-diversified fund, where Anheuser-Busch InBev (NYSE:BUD) takes the top spot with 4.15% weight, followed by Unilever (NYSE:UL) and Siemens (OTCPK:SIEGY) with over 3% exposure each. The rest of the stocks don't account for more than 2.6% of the portfolio individually. In total, the fund holds about 296 stocks.
Sector-wise, Consumer Staples gets the highest exposure with 18.2% of the portfolio. Industrials, Consumer Discretionary, Financials and Healthcare also get double-digit exposure in the basket.
As far as country exposure goes, France (21.1%) gets the top priority, while Germany (19.7%), United Kingdom (17.9%) and Spain (10.3%) take up the next three positions. The fund charges about 83 bps in fees.
As per ETF.com, RFEU has already amassed $25.8 million in its asset base. The fund is up 1.3% in the last 10 days (as of April 25, 2016).
How Does it Fit in a Portfolio?
RFEU is a good choice for investors seeking capital appreciation through exposure to European stocks. Additionally, the ETF will also provide diversification benefits to investors.
Meanwhile, in March, the ECB came up with a more intensified economic stimulus and opted for multiple rate cuts and the expansion of its quantitative easing program to boost the economy. Monthly asset purchases were raised to EUR 80 billion from EUR 60 billion previously.
So, the launch of the new ETF targeting this market seems well timed.
The newly launched ETF will have to face competition from Europe-focused ETFs like the Vanguard FTSE Europe ETF (NYSEARCA:VGK). VGK is one of the most popular ETFs in the space, with an asset base of $14.1 billion and average trading volume of 5.1 million shares. The fund tracks the FTSE Developed Europe All Cap Index and charges 12 basis points as fees, which is much lower than the aforementioned product.
The iShares MSCI EMU ETF (BATS:EZU) is another popular fund in the space, with an asset base of $12.8 billion and trades in a good volume of more than 8 million shares a day. The fund tracks the MSCI EMU Index. The fund charges 47 basis points as fees (see all European Equity ETFs here).
Apart from these, RFEU could also face competition from the iShares Europe ETF (NYSEARCA:IEV) tracking the S&P Europe 350 Index. The fund has an asset base of $2.7 billion and volume of almost 835,000 shares a day. It has an expense ratio of 60 bps.
Thus, the newly launched fund is costlier than the popular ETFs in the space. So, to garner investors' money, the fund needs to sell its actively managed strategy and hope for some outperformance over traditional benchmarks as well.