It has been about a year when I started this journey towards financial independence. By this time the value of the portfolio has already exceeded EUR 70k. Still very far from one million, but considering that the first couple of years are always slow in terms of portfolio growth, it’s not too bad at all. Even though the current portfolio value is not that high yet, one thing became very clear during my regular investment reviews: I’m getting more and more affected by the EUR/USD exchange rate. Should I add more EUR assets to my portfolio? Even if yes, is it the right time? This is what keeps me thinking these days.
The Currency Risk
If you are not a first time reader, you might already know that I live in the Netherlands. I get my salary in EUR, spend in EUR, and if I invest in a non EUR asset, first I need to do a conversion (typically to USD). Actually living in the Euro zone is already a big advantage. Yes, the common currency might be not perfect (any readers from Greece?), but if it was before 2012, we would still use Dutch guilder here, so every investment I would make outside of the Netherlands would have an exchange rate risk.
If you have a look at my portfolio, you will see that my top 3 holdings are European companies. But if you add together the EUR denominated stocks, they represent less than 10% of my overall stock and bond holdings. This is why exchange rate (especially the current volatile one) is an issue, which would only get bigger over time if I don’t pay attention.
I am one of those who strongly believe in a strong and unified Europe both from a financial, economical and cultural perspective. This is why I’m worried and angry at the same time when I see things like Brexit and hear about the increased support of nationalist and extremist parties in many European countries.
And these are exactly the reasons that make European investments more risky, because otherwise European stocks are cheap!
European Stock Valuation
At the time of writing this article, European stocks are the cheapest in 40 years if you compare them to their US counterparts. As published by CNBC, Bank of America Merrill Lynch expects double-digit corporate earnings growth in Europe, the first time since 2010. On a price to book basis, European stocks are around 40% cheaper than the US ones. Currently the MSCI Europe Index trades around 14.7 times forward earnings, while the MSCI USA is closer to 18. European stocks look cheap even on a global level.
How to Get More Exposure in European Stocks?
If I want to increase the weight of European equities in my portfolio, I have several options.
First of all I could obviously buy individual stocks. Currently I have the following EUR denominated stocks in my portfolio:
- Royal Dutch Shell
- ABN Amro
As I already set it for myself as a rule in the conclusion article of the Searching for the Perfect Portfolio series, I want to keep the number of individual stocks around 30, as it might get a bit difficult to properly overview my investment if I increase this number too much. RDSA and Unilever are already among my top 3 investments. I could buy more, but I also don’t want to get over-exposed in any individual stock. I could buy more Sanofi or ABN Amro and this is something I am considering.
At the same time I could buy European stocks via an ETF. There are two ETFs that I am considering at the moment, both are from Vanguard.
One of them is the FTSE Developed Europe UCITS ETF (VEUR), the other is FTSE Developed Europe ex UK UCITS ETF (VERX). Both of them has a low, 0.12% expense ratio. The expense ratio is the main reason why I’m looking at the Vanguard ETFs. There are also plenty of other ETFs out there, like IMEU or EZU from iShares, but as far as I see they all come with a higher expense ratio.
Related article: The Importance of Expense Ratio
The difference between VEUR and VERX is that the latter one does not include stocks from the UK. This sounds better for me as I want to minimize the exchange rate impact (20% of the ETF is still in Swiss equities, plus it also invests in a smaller percentage in Scandinavian countries that are outside the euro zone). In addition I’m not that positive about the short to medium term outlook of the UK after the Brexit.
What else should we know about VERX?
- It currently holds 413 individual stocks, so it is well diversified
- The top two sectors are financials and consumer goods. The European financial sector is the one that has the most upside potential according to a recent report of Morgan Stanley. Consumer goods are more defensive and I don’t mind seeing companies among the top holdings like Nestle and Unilever
- The current yield is 2.74% which is not too bad, especially if you compare it to the 1.82% yield of VTI. The distributions happen on a quarterly basis, but very unequally. The majority of it is paid out in June as this is the period when most European stocks pay dividends (quarterly dividend payments are not that common in Europe)
- VERX is an Irish domiciled ETF and as a Dutch resident investor I would pay no Irish withholding tax on the distributions.
The more I think about it the more I believe that it would be a good step to increase the European exposure of my portfolio. The low valuation, reasonable dividend yield and the lack of FX risk are all in he favor of it.
What is your view on this? Would you, and if yes, how would you invest in Europe? If you are from the US, would the exchange rate risk discourage you? Or on the contrary: do you see the strong USD an extra reason to step in the European stock market? I am interested to hear your thoughts!
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Disclaimer: This post or any other information on the site is not intended to be and does not constitute financial advice or any other advice. I am solely sharing my idea, plan and progress on early retirement.