Hedge Funds Reduce Europe Shorts — A Look At Europe ETFs

Bloomberg reported on Aug 13 that hedge funds are covering their European shorts. Does that mean you should buy?  No … not at this time.  There is time and room to wait for more certainty.  The continued downside risks are still substantial.

Bloomberg said this:

“Hedge funds that base investment decisions on economic trends are unwinding bets against European stocks at the fastest pace in three years, speculating policy makers will step up the fight against the debt crisis.”


Shorts needing to cover in a rally, and perhaps temporarily strengthening a rally, is an entirely different matter than what long investors should do.  Each portfolio should be operated to meet the purposes for which is it intended.  If your portfolio is not a trading portfolio, but is instead one based on long-term value development … wait.

Europe ETFs:

In this post we look at 9 Europe ETFs versus the S&P 500 represented by SPY.  The Europe ETFs are:

  • FEU: Stoxx Europe 50
  • IEV: S&P Europe 350
  • VGK: MSCI Europe
  • FEZ: Euro Stoxx 50
  • FDD: Stoxx Select European Dividend
  • EWG: MSCI Germany
  • EWP: MSCI Spain
  • EWI: MSCI Italy

Relative Performance Charts (from StockCharts.com):

There is a rally ongoing in European stocks that generally parallels the rally in US stocks since June, but European stocks are far behind the US on a 12-month basis.

Germany is the strongest stock market in the Euro Zone, and Spain is the weakest of the major countries in Europe.

Putting the Europe Rally In Long-Term Chart Perspective:

These multi-year weekly charts show the rally to be something that may be of immediate concern to shorts, but not encouraging to long-term investors, who are unwilling to bet that the carnage is over in Europe.

Each chart plots the 52-week moving average in gold, and a in red plots the 20% negative offset (the “bear market” level) from the 52-week trailing high.

MSCI Europe

click this and other images to enlarge to full size


Better than Spain and Italy, but not yet crying out to be purchased. Italy and Spain are still chart disasters.



Trailing Returns Reported by Morningstar:

The Stoxx Europe 50 mega-cap ETF has the best 12-month return among the European funds, but still substantially negative, versus the positive 12-month return for the S&P 500.

Trailing Valuation Metrics, Expenses, Assets, and Turnover:

The S&P 500 is the most expensive in terms of trailing valuation (excluding PEG ratios, not shown).  Spain and Italy have the lowest trailing multiples — P/E below 8, P/B below 1, and P/CF below 4.

Prospective Valuation Metrics and Growth Rates:

The S&P 500 is the most expensive on prospective valuation metrics, including the PEG ratio (not shown, but compare the prospective P/E to Long-Term Earnings Growth figures).

Italy and Spain are the least expensive, including PEG ratio.  P/E under 8, PEG under 1, prospective P/B under 1, prospective P/CF under 3. These data are the strongest support for taking positions in Spain or Italy now, but why not wait for the price movement to go positive first.

Upside and Downside Return Capture vs. S&P 500:

SPY, appropriately, has upside and downside capture of the S&P 500 index in the 99+% range.

As an indication of the volatility, Germany has a 1-year upside capture of 145%, and a downside capture of 150%.

Basket case Spain has a 1-year upside capture of 83% and a downside capture of 162%.

Volatility and Sharpe Ratio:

The S&P 500 has the best Sharpe Ratio (3-yr total return in excess of 3-mo Treasury yield, divided by 3-year standard deviation) — return you get for volatility risk you take.

Spain and Italy have the worst Sharpe Ratios.

Sector Allocation:

The S&P 500 is weighted most in technology (18.2%), financial services and consumer defensive, in that order.

The Stoxx Europe 50 is most heavily weighted in consumer defensive (20.4%), healthcare, and financial services.

Germany’s top three sectors are consumer cyclical (18.6%), industrials, and financial services.

Italy has these three top sectors; energy (34.1%), financial services, and utilities.

Spain is most heavily weighted in financial services, (39.6%), communications services, and industrials.


There will be a time when Europe may become the greater opportunity due to recovery from highly depressed levels, but not until there is a combination of low valuation metrics, rising prices and apparent resolution of key macro-economic issues in Europe.


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