SPDR Euro STOXX 50 ETF (ticker: FEZ) is a passively managed, all European equity, ETF. Its valuation has been punished by the markets over the past 18 months and it closed at $31.14 on this publishing date. Whenever that kind of slide happens, I tend to put the position under a magnifying glass. Closer inspection is needed in order to validate whether the same factors which got me into it continue to hold? Should FEZ still be considered a long term investment within my portfolio? What’s causing the decline? Is the decline related to the nature of the security, or the underlying companies? Is it a worthwhile candidate for me to purchase more shares in?

Should I Invest More in Europe? The Case For FEZ as a Long Term Investment Which Mitigates Portfolio Risk.

 

Why is FEZ in my Portfolio in the First Place

As part of my overall long term investing strategy, FEZ has given my portfolio diversification with exposure to the Eurozone. The Euro area is the world’s second largest economy, covering over 338 million people with a GDP of $13,241 billion. China’s economy is $10,355 billion, in comparison, and the US economy is $17,416 billion. I have held FEZ in my investment portfolio for a number of years now. I’ve been satisfied with the returns and growth of this European investment and the role its played mitigating portfolio risk. I’ve trimmed back or bought shares as determined by the markets rising and falling. This ETF was bought with the mindset of keeping it as a long term investment.

As a secondary core holding, FEZ, offers me broad exposure to 54 of the largest publicly traded companies within 12 developed countries of the Eurozone. Approximately 80% of FEZ assets are based in the Eurozone’s 3 largest economies including Europe’s economic powerhouse Germany (32.39% of assets); France (36.44% of assets) and Spain (10.49% of assets) round out the Euro area top 3. With $3.24 billion in assets, this ETF is composed of the bluest of the Eurozone’s blue chip companies with a weighted average market cap of $65,373.89 million. So, it’s mostly mega cap (84.94%) followed by large cap (15.06%). The top ten companies are: Total, Bayer, Sanofi, Anheuser Busch InBev, Daimler, Allianz, SAP, Siemens, Banco Santander and BASF.

A sector breakdown shows the biggest components making up 50% of FEZ are Financial Services 22.09%, Consumer Defensive 12.17%, Industrials 11.91% and Healthcare 11.23%.

A review of some of FEZ stats and risk measures show an expense ratio of 0.29% and a 12 month yield of 3.24% (the average S&P  dividend yield is approx: 2.2%). It’s a European ETF so there are tax implications. The 52 week trading range is $29.64-$40.81. It has a turnover ratio 6%, 5-Year Beta 1.23, R-Squared 84.32, Alpha 0.67 and Sharpe Ratio 0.06. Held, in my portfolio without trading, for the past 5 years it would have underperformed the benchmark.

 

What is Causing the Weakness in FEZ

The hammering the ETF’s valuation is taking is the result of European Financials Services being taken to the woodshed. These problems, compounded by multiple political risks affecting the European Union and European equity markets, have resulted in a broad based weakness.  Some of the key issues facing Europe are:

  1. The pending British referendum on whether to stay in the EU. Somehow markets are hedging bets at this point on a possible Brixit. However, whatever happens, over time markets will bounce back as the probable European response to a British exit may be to close ranks and deepen the intergration. It pays to be a long term investor.
  2. There are Euro-Skeptic parties in several countries including Germany and many popular ones in France. This may prove to be the most difficult problem to resolve.
  3. The common currency has management issues. The financial crisis is still an ongoing affair in Europe with some countries grazing the edges of a recession. Growth is weak in the Euro area, coming in at a mere 0.5% last quarter.
  4. The Syrian refugee crisis is putting a strain on country-to-country relationships within the European Union and accordingly the Eurozone. Recently, Greece recalled its ambassador to Austria which may close its borders to negate migrate flows.
  5. Export dependent Europe is feeling China’s economic slowdown and emerging markets economic woes while the strong greenback has a somewhat moderating affect. Having a trade embargo against its 3rd largest trading partner, Russia, also does not help the European economy.
  6. The Greek bailout is still not resolved. We all know what happened to markets the last time the issue reared its head.

I believe that the political risks will slowly dissipate in the Eurozone’s favor as, ultimately, there is strong political will amongst the largest economies for the idea of a European “union” which goes beyond economics.

Does FEZ still deliver good Risk Adjusted Returns?

Keeping in mind the long term investing timeline I have for FEZ , should I buy more? This is more a question of “when” and not “if”. This ETF is suffering as all developing markets equity is suffering. Let’s face it, global financial markets for whatever reason are now being driven by, and tracking, the rise and fall of the price of WTI. As long as crude prices are sinking then FEZ will continue to suffer. While I have never tried to time the market, some insight into where oil is going would be a definite advantage. While no one predicted oil would fall below $30, some are now saying it could go as low as $15-$20. That being said, and macro-economic and geo-political factors aside, can FEZ go lower? Maybe, possibly. I have no way of knowing or predicting the price of oil. So, for my part, to manage portfolio risk, I’ll split my overall purchase into 6 tranches and buy FEZ over time.

 

 

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