Join Eurozone Rally With These ETFs

Amid political tensions ahead of elections in some of the biggest economies, the Eurozone has been shining this year. This is especially true as the economy enjoyed its strongest quarter in nearly six years buoyed by strengthening business and factory activity.

Encouraging Fundamentals

A broad gauge of economic activity for the 19-member bloc – the final IHS Markit Composite Purchasing Managers’ Index (PMI) – jumped to 56.4 in March from 56 in February. This index expanded in each of the past 45 months, reflecting accelerated pace of growth. The data suggests broad-based recovery with Germany, Europe’s largest economy, leading the way, followed by Ireland, Spain and France.

The major threat to Eurozone – increased unemployment and deflation – that pushed the economy into recession was abated fully. This is because unemployment across the Eurozone dropped to a nearly eight-year low to 9.5% in February. Czech Republic and Germany have lower unemployment rates of 3.4% and 3.9%, respectively, while Greece and Spain have the highest rates of 23.1% and 18%, respectively.

Meanwhile, inflation is near the European Central Bank (ECB) target of 2%, indicating that Eurozone is clearly out of a deflationary spiral. While inflation plunged to 1.5% in March and falls below the ECB target, the slowdown seems temporary caused by lower energy prices.

Given encouraging fundamentals, the ECB raised the growth outlook for Eurozone from 1.7% to $1.8% for this year and from 1.6% to 1.7% for the next. Inflation is expected to reach 1.7% this year and 1.6% in the next, up from the previous forecast of 1.3% and 1.5%, respectively.

Further, ECB will continue with its unprecedented easing measures to stimulate the Eurozone economy even after the faster-than-expected rebound in inflation and growth. The central bank has kept its interest rates unchanged in the negative territory and bonds purchases at €80 billion a month.

Other Factors

Apart from improving economic fundamentals, the end of earnings stagnation has instilled confidence in the stocks. Fourth-quarter 2016 marked return to earnings growth for the first time in four years and improved earnings estimates for the group for the next quarters.

Moreover, Eurozone stocks seem attractive at current levels. Per many analysts, these stocks are the cheapest relative to U.S. stocks in many years, making them an attractive buys even with looming political risks.

ETFs to Consider

As such, we have highlighted a number of ETFs having exposure to these economies that could be considered great plays given the current trends and increasing confidence. All these funds have a Zacks ETF Rank of 3 or ‘Hold’ rating, hinting at upside in the coming months. Additionally, these funds have enjoyed strong momentum and generated handsome returns in the year-to-date period.

iShares MSCI Eurozone ETF (EZU – Free Report)

This product provides exposure to developed market countries using the Euro for currency by tracking the MSCI EMU index. It holds about 247 securities in its basket with none holding more than 2.82% share. The fund is widely spread across sectors with financials, industrials, consumer discretionary and consumer staples taking a double-digit allocation each. From a country look, France and Germany take the biggest share in the basket with 32.1% and 29.8%, respectively. EZU is one of the most popular ETFs in the broader European space with AUM of nearly $9.3 billion and average daily volume of more than 4.9 million shares. It charges investors 0.48% in annual fees and has gained 7.5% so far this year.