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Will Expensive European ETFs Continue To Outperform Cheap Emerging Market ETFs?

22 August 2012 at 12:13 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

Over the last 3 months, Vanguard Emerging Markets (VWO) amassed $3.3 billion in new assets under management. Year-to-date, the net new dollars for VWO approximated $9.7 billion.

In contrast, the year-to-date net inflow for PowerShares NASDAQ 100 (QQQ) and Vanguard S&P 500 (VOO) was $2.7 billion and $2.5 billion respectively. And Europe? Most of the European proxies experienced little change or they experienced net outflows.

Perhaps ironically, the relative strength in European equities compared to emerging market counterparts is greater than at any other point in 2012. This relationship can be seen in the Vanguard Europe (VGK)-Vanguard Emerging Markets (VWO) price ratio.

VGK and VWO price ratio

Indeed, those who have ventured into the murkiest European waters are currently benefiting from a technical uptrend in Vanguard Europe (VGK). The price of VGK has literally catapulted 18.5% off its June lows.

VGK 3 Months

Some analysts have suggested that¬†the recent upturn reflects a¬†recognition of¬†the true nature of¬†European businesses; that is, big European-based corporations do the majority of their business abroad, just like¬†U.S. multinationals do.¬†It follows that some believe¬†Europe’s debt crisis had “unfairly” punished¬†European equities.

Still, is this notion of healthy mutlinationals reason enough to overlook a deepening European Union recession? The folks at WisdomTree seem to think that it might be.

Recently, WisdomTree explained that it intends to restructure its DEFA Hedged Equity Index Fund (HEDJ). The new fund will own European stocks without the currency risk of the euro. Specifically, HEDJ will seek dividend-paying corporations that create more than 50% of their revenues from outside of Europe where European exports are likely to benefit from euro-dollar depreciation.

Theoretical constructs notwithstanding,¬†the¬†P/E on the Bloomberg European 500¬†for 2012 estimated earnings is 16.6. That P/E hardly screams “bargain” when¬†the current P/E for the S&P 500 is roughly 14.2 and the¬†MSCI Emerging Market Index chimes in¬†at 11.8.

Although VGK’s momentum is presently stronger than VWO,¬†I’d rather invest in countries or regions where¬†fundamental data support the technical¬†data.¬†For instance, Malaysia and Thailand have expanding economies, low unemployment and¬†modest inflation; their multinationals are¬†profitable at home and abroad.¬†In fact, investors in¬†iShares MSCI Malaysia (EWM)¬†and¬†iShares MSCI Thailand (THD)¬†have experienced¬†capital appreciation¬†with far less volatility than those¬†seeking fortunes¬†in Europe.


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Disclosure Statement: ETF Expert is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. 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.

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