According to institutional investors, European equities could be in for double-digit returns in 2016, outperforming other regions of the world. The STOXX Europe 600 Index has an average 2016 return estimate of 12.1%. European stocks are gaining optimism, as U.S. equities are forecast to remain relatively flat to lower by the end of 2016. The shifting attention to Europe comes as European corporate earnings rebounded in 2015 and are poised to continue their positive momentum in 2016. Barclays sees European earnings jumping 11% in 2016, while Deutsche Bank estimates 9% earnings growth, and Goldman Sachs forecasts 8% growth for STOXX 600 earnings growth in 2016.
Aside from reviving earnings from Europe, the weakening of the euro and easy-money policies from the European Central Bank (ECB) have aided the increase in business activity in the region. As the economic recovery of Europe continues to gain steam, consider these three exchange-traded funds (ETFs) for alpha in 2016.
PowerShares Europe Currency Hedged Low Volatility Portfolio
The PowerShares Europe Currency Hedged Low Volatility Portfolio (NYSEARCA: FXEU) is designed to provide investors with exposure to Europe, while maintaining low volatility and foreign exchange risk. The ETF has an expense ratio of 0.25% and returned -1.91% in 2015, after the ETF began trading in May 2015. The portfolio of this hedged, low-volatility ETF is 100% focused in developed European equities, excluding the United Kingdom. With the United Kingdom strongly considering exiting the European Union, some analysts predict that the move could push the fragile U.K. economy back into recession. While there has been no official decision yet as to whether Britain will stay or pull out of the EU, investors should remain cautious on heavy exposure to the U.K.
The three largest sector holdings in the PowerShares Europe Currency Hedged Low Volatility ETF are industrials at 18.26%, financial services at 16.61% and real estate at 14.69%. The three largest holdings are MAN SE at 3.39%, Kabel Deutschland Holdings at 1.77% and Rhoen Klinikum at 1.66%.
WisdomTree Europe Small Cap Dividend Fund
Investors looking for more of a higher risk, higher return play on European stocks should analyze the WisdomTree Europe Small Cap Dividend Fund (NYSEARCA: DFE). The ETF is not the cheapest option out there, with an expense ratio of 0.58%, but it yields 2.77% and returned 11.75% in 2015. While a 71.84% majority of the portfolio remains in developed Europe, the ETF also retains a 27.61% portfolio weighting in U.K. equities and small positions within emerging European economies. The small-cap dividend ETF has its largest weighting in the industrials sector at 24.63%, followed by the consumer cyclical sector at 17.65% and technology stocks at 12.85%. The WisdomTree Europe Small Cap Dividend ETF's top three holdings are Cofinimmo NV/SA at 1.75%, Bilfinger SE at 1.22% and Cembra Money Bank AG at 1.17%.
WisdomTree Germany Hedged Equity Fund
There is no denying that Germany is the key to stability within the European Union. Aside from France, Germany is often viewed as a bellwether for the overall health of the European economy. Often, a slumping Germany signals an overall slumping Europe. The WisdomTree Germany Hedged Equity Fund (NASDAQ: DXGE) is an excellent choice for German equity exposure while hedging against currency risks. The ETF has costs of 0.48%, yields 1.87% and gained 3.67% in 2015. The ETF is fully invested in Germany with the three largest sector weighting being consumer cyclical at 23.67%, financial services at 17.51% and industrials at 15.59%. The three largest holdings of the WisdomTree Germany Hedged Equity ETF are Allianz SE at 7.29%, Deutsche Telekom AG at 6.59% and Siemens AG at 5.99%.
