Insights


Opportunities in Eurozone Equities through Low Volatility and Stable Dividends

  • While eurozone equities have recovered, they still lag US equities, which are near pre-crisis all-time highs. This divergence has created a compelling relative valuation opportunity.
  • Lingering uncertainty and equity price sensitivity could justify a low volatility or stable dividend approach for investors seeking to remain (or reinitiate) long positions.
  • SPDR ETFs offer a Low Volatility approach that provides the lowest volatility exposure across the most popular risk-based factor indices.

Global equities have experienced a significant drawdown in 2020, related to the COVID-19 and the associated economic shutdown. The pullback in eurozone equities was especially deep given the timing and severity at which the pandemic hit critical countries (i.e. France and Italy) and the sector composition of European indices. Eurozone indices are highly sensitive to oil prices, consumer goods and tourism/travel and are much less sensitive to the technology sector (which has relatively benefitted from the ‘virtual economy’ trade). This has resulted in a relative recovery of eurozone equities, which remain behind the US from an asset price perspective despite major European economies re-opening a bit sooner.

As we have discussed for some time now, as equity volatility continues to stabilise, investors are increasingly preparing for a market that will once again trade on fundamentals. The recovery remains slow, and we are likely to see businesses undergoing structural changes as a result of the global pandemic. We are still a long way from having clarity on distinct winners, but markets continue to rebound. The US market has recouped nearly all of its year-to-date loses, as the major indices re-approach their (pre-crisis) all-time highs. Eurozone indices remain on sale.

The relative opportunity to play the recovery through eurozone equities remains appealing to investors, provided they can protect the portfolio by taking long equity positions using low volatility and stable dividend strategies. While many indices seek to target lower risk, less volatile stocks, SPDR ETFs offer a low volatility strategy that follows a simple yet effective methodology.

The eurozone low volatility strategy tracked by our SPDR ETF offers two important features that set it apart from the minimum volatility indices. Low volatility indices are largely ‘unconstrained,’ which allows them more flexibility in targeting lower volatility, and they are more ‘dynamic’ as a result of rebalancing more frequently. These distinctions help low volatility often display the lowest volatility (i.e. the highest factor exposure), as compared to comparable minimum volatility strategies (see Figure 1). As the chart shows, the EURO STOXX Low Risk Weighted 100 Index (which our ETF tracks) offers the strongest exposure to the (low) volatility factor.

How to play this theme

In one simple trade, investors can either lower the risk or enhance the dividend yield in their portfolio, while remaining invested in eurozone equities, using SPDR ETFs. To learn more about these funds, and to view performance histories, please follow these links:

SPDR EURO STOXX Low Volatility UCITS ETF

SPDR S&P Euro Dividend Aristocrats UCITS ETF

Figure 1 Current FaCS Active Exposure Comparison (vs. EURO STOXX Index)

Source: State Street Global Advisors, STOXX Indices, BarraOne, as of 17 June 2020. Exposures are as of the date shown and should not be relied upon as current thereafter.


Flows


European-Domicilied ETP Segment Flows (Top/Bottom 5, $mn)

European-Domicilied ETP Asset Category Flows ($mn)

Sources: Bloomberg Finance L.P., for the period 11-18 June 2020. Flows are as of date indicated and should not be relied upon as current thereafter.