European stocks are quietly benefiting from strong momentum. The two largest European ETFs, the Vanguard FTSE Europe ETF (NYSEARCA:VGK) and the iShares MSCI Eurozone ETF (BATS:EZU) are up 15.9% and 20.0% respectively over the last six months. However, there are still many reasons to consider exposure to European stocks and ETFs, which I am bullish on due to their renewed momentum, undemanding valuations and attractive dividends.
So now is a good time to compare VGK vs EZU to determine which is the best Europe-focused ETF for investors, as we’ll review below.
What are the strategies of the VGK and EZU ETFs?
VGK is an index fund from Vanguard that invests in the FTSE Developed Europe All Cap Index, which measures the investment return on shares issued by companies located in the main markets of Europe.
The fund debuted in 2005 and has $18.9 billion in assets under management (AUM), making it the largest European ETF on the market.
Meanwhile, EZU, part of the iShares ETF cohort, debuted in 2000 and is also a popular choice among investors, as it has $7.5 billion in assets under management.
EZU is an index fund that, according to iShares, “seeks to track the investment results of an index composed of large and mid-cap stocks from developed countries that use the Euro as their official currency.”
iShares explains that EZU can be used by investors to gain “exposure to developed countries using the Euro as their currency” and that it gives investors “convenient access to a wide range of Eurozone stocks.” The ETF can be used by US investors to “diversify internationally and express their views on the Eurozone”.
Why is investing in Europe an attractive idea right now?
We often hear that the European market has underperformed the American market for many years. However, European stocks look attractive overall for several reasons.
First and foremost, European stocks are cheap and much cheaper than their American counterparts. For example, the S&P 500 (SPX) trades at 23.2 times earnings, while the average price-to-earnings multiple of VGK holdings is significantly lower at 14.7 times.
Additionally, overall, European stocks offer higher dividend yields than U.S. stocks. For example, VGK’s yield is 3.4%, more than double the S&P 500’s current yield of 1.4%.
Finally, even though they are cheaper and offer higher yields, European stocks seem to be turning a corner in terms of momentum and performance.
Goldman Sachs (NYSE:GS) coined the acronym “GRANOLAS” (reminiscent of “FAANG” stocks or, more recently, the Magnificent Seven in the United States) to salute a group of “quality European growth players with international exposure” .
The GRANOLAS group is made up of 11 values — ASML (NASDAQ: ASML), AstraZeneca (NASDAQ:AZN), GlaxoSmithKline (NYSE:GSK), L’Oreal (OTC:LRLCY), LVMH (OTC:LVMUY), Nestlé (OTC:NSRGY), Novartis (NYSE:NVS), Novo Nordisk (NYSE:NVO), Rock (OTC: RHHBY), Sanofi (NASDAQ:SNY) and SAP (NYSE:SAP).
This cohort helped push Europe’s STOXX 600 index up 12.3% over the past six months and hit a record high in March before U.S. and European markets collapsed due to geopolitical concerns and fears that interest rates will remain high for longer.
And believe it or not, while the Magnificent Seven seems to get a lot more attention, Goldman Sachs found that GRANOLAS has actually outperformed the Magnificent Seven over the past two years, with lower volatility than the Magnificent Seven .
What shares do EZU and VGK hold?
EZU offers investors broad diversification; he holds 224 stocks and his top 10 holdings represent a very reasonable 29.8% of the fund. Below, you’ll find a look at EZU’s top 10 stocks using TipRanks’ headlines tool.
However, VGK offers even more diversification and less concentration: the Vanguard fund holds 1,279 stocks and its top 10 holdings represent only 19.8% of the fund. Below you will find an overview of VGK’s top 10 titles.
Although the two funds share a few top holdings in common, including ASML, LVMH Moet Hennessy and SAP, overall there is less overlap than one might expect, given that both funds are both focused on Europe. Note that VGK offers investors greater exposure to GRANOLAS – with eight of GRANOLA stocks in its top 10 holdings compared to four for EZU.
Performance Comparison
As of March 31, VGK had returned 5.7% on an annualized basis over the past three years and 8.0% on an annualized basis over the past five years. EZU outperformed VGK by very little, with a three-year annualized return of 5.9% and 8.6% over the past five years as of this date. Over the past 10 years, the funds have delivered identical annualized returns of 4.6%.
While these returns have been poor, they also create the opportunity to invest in these stocks at relatively cheap levels today, and there is room for upside ahead.
Which ETF has the highest dividend yield?
Both of these ETFs pay dividends with decent payouts, but VGK’s 3.4% dividend yield easily trumps EZU’s 2.5% yield.
Which ETF is the best deal?
One area that really separates these two ETFs is their expense ratio. VGK charges a very low expense ratio of just 0.11%, meaning an investor in the fund will only pay $11 on a $10,000 investment per year. This is a favorable expense ratio, to begin with, and is even more remarkable when you consider that VGK is an ETF that invests in international stocks, and these types of ETFs are typically offered to considerably higher prices.
Meanwhile, EZU charges an expense ratio of 0.51%. This means that an investor in EZU will pay $51 in fees per year on a $10,000 investment. That’s not great for an international ETF, but it’s clear that it’s almost five times what VGK charges.
Assuming each ETF maintains its current expense ratio, the investor who invests $10,000 in VGK will only pay $115 in fees over 10 years, while the investor in EZU will pay much more – $640 over the same period .
Is VGK Stock a Buy, According to Analysts?
When it comes to Wall Street, VGK earns a Moderate Buy consensus rating based on 643 Buy ratings, 566 Holds, and 71 Sell ratings assigned over the past three months. VGK’s average stock price target of $74.15 implies 14.6% upside potential.
Is EZU Stock a Buy, According to Analysts?
Meanwhile, EZU earns a Moderate Buy consensus rating based on 161 Buy, 53 Hold, and 11 Sell ratings assigned over the past three months. EZU’s average stock price target of $54.75 implies 12.4% upside potential.
Choose a winner
Both funds have performed similarly over the past 10 years, while EZU has narrowly outperformed VGK in recent years. However, VGK clearly appears to be the better choice due to its much lower expense ratio, higher dividend yield, and superior diversification.
I’m overall bullish on VGK, based on European stocks’ attractive valuations (not to mention the recent momentum they’ve gained) and the fund’s favorable expense ratio, strong diversification, and attractive dividend yield by 3.4%. I also like that VGK gives investors exposure to all the high-powered GRANOLA stocks.
Disclosure