Vanguard FTSE Dev Eurp UCITS ETF GBP (LSE:VEUR) - ETF price


ETF Report

Vanguard FTSE Developed Europe UCITS ETF (GBP) VEUR

AnalystReport

PortfolioConstruction

The FTSE Developed Europe Index includes approximately 90%-95% of the equity market capitalisation of 15 countries across developed Europe. As we write, the index is composed of approximately 600 stocks. Components must meet minimum criteria for liquidity, as well as foreign ownership restrictions. The securities are weighted by free-float market capitalisation. The index's largest sector is financial services, with a 20%-25% weighting, followed by healthcare and consumer defensive (both 12%-15%). Eurozone companies account for approximately half of the index's value, followed by the United Kingdom (25%-30%), Switzerland (10%-15%), and the Nordics (8%-10%). Within the eurozone exposure, Germany and France have the largest weightings, accounting for 15%-18% each.

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Fees

With an ongoing charge of 0.12%, this fund is one of the cheapest passive offerings in its category and has a substantial cost advantage relative to active mandates. Index funds should provide the returns of their benchmark, less fees. However, this fund routinely outperforms the index. This can be attributed to the fact that the fund is domiciled in Ireland and enjoys a lower dividend-withholding tax rate in comparison with the index. Besides, albeit on a small scale, the fund benefits from securities-lending revenues. The fund's annualised tracking error over the past three-year period has been low. Tracking error is a measure of how consistently a fund tracks its benchmark index. The closer the tracking error is to zero, the better or more efficient the fund is. Investors should also consider trading costs, including bid-ask spreads and brokerage fees, when buying and selling the ETF.

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FundConstruction

The fund employs a close-to-full replication approach to track the performance of the FTSE Developed Europe Total Net Return Index. This means that whenever practicable, the fund can hold all securities from the index, but at times when full replication is less cost-efficient, the fund employs a sampling process. Portfolio managers seek to add value by minimising costs and cash drag. For instance, to limit market impact, they try to anticipate index changes and corporate actions and may trade a few days before or after the change takes place. Also, to limit cash drag caused by investor inflows/outflows and dividend payments, managers can use futures for an amount equivalent to up to 1% of the fund's value. Client portfolios are managed where the clients are located, but trades are executed locally. Securities lending is implemented within this fund.

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Suitability

Vanguard FTSE Developed Europe ETF is one of our best picks for comprehensive access to the market of developed European equities. It has earned a Morningstar Analyst Rating of Gold.

The exchange-traded fund's portfolio represents 90%-95% of the European developed equity market. Compared with the average offering in the Europe large-cap blend equity Morningstar Category, which includes actively managed funds, the FTSE Developed Europe Index has a very modest overweighting in large caps at the expense of mid-caps and small caps. Nonetheless, it provides an adequate representation of the opportunity set available to investors.

At 0.12%, the fund is among the cheapest Europe equity passive funds in its category.

The fund has delivered top-ranking risk-adjusted returns during the trailing three- and five-year periods, proving that it is a tough competitor to beat for active managers. Other funds tracking similar benchmarks have also delivered above-average performance in the trailing 10-year period. In terms of tracking, this Vanguard fund shows consistent outperformance against both its benchmark and direct competitors. The fund is domiciled in Ireland and so benefits from much lower withholding tax rates on stocks listed in the eurozone and Sweden relative to those factored in for index calculations.

The source of Vanguard's competitive advantage and the foundation of its culture is its mutual ownership structure. Fund shareholders own Vanguard through their funds, compelling the firm to operate at cost rather than for profit and ensuring that investors' interests come first.

Overall, the FTSE Developed Europe Index is one the most comprehensive indexes tracked by passive funds in the Europe large-blend equity category, and it has proved difficult to beat by active managers over time. The fund is among the cheapest and best-performing passive option for this market exposure, which makes us highly confident in its ability to continue delivering returns above the category average.

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Fundamental View

This FTSE Developed Europe Index is made up of large-, mid-, and small-cap companies and, as of this writing, excludes micro-cap companies.

Approximately 50%-55% of the fund is invested in stocks listed in eurozone countries, mostly French and German companies. It also has significant exposure to UK stocks, which account for about 25%-30%. But the countries where the fund's holdings are listed are not necessarily indicative of the portfolio's economic exposure. While most of these firms do a lot of business in their own countries, the largest holdings tend to have global operations.

Of all the index strategies within the category, the Stoxx Europe 600 and FTSE Developed Europe indexes provide the broadest, most extensive coverage of the market. With its fixed 600 stocks, the Stoxx Europe 600 Index covers 98%-99% of the universe. The FTSE Developed Europe Index aims to cover 98% of the universe; it holds around 570 stocks as of this review. Another strategy that we view favourably is the MSCI Europe Index, which covers 85% of the market.

We hold a general preference for the broadest cap-weighted indexes, as they tend to be the most representative. The broader the index, the harder it becomes for active managers to boost relative returns over the long term through stock selection.

The FTSE Developed Europe Index's positive performance over the past five years has come from its allocation to French, UK, and German equities. In addition, as this is an index fund, the portfolio managers keep the fund fully invested at all times, which provided a tailwind relative to the category during the past five-year bull market. However, maintaining a near-zero allocation to cash has the opposite effect in falling markets and might cause the fund to underperform its category peers.

Market-cap weighting skews the portfolio toward the largest stocks in the world, such as Nestle, Novartis, and HSBC. But the average market cap of the fund's holdings is in line with the category. There are no limits on sector or country weightings, but the fund's broad reach helps diversify risk. It includes 600 stocks, and the top 10 holdings represent only 16% of its assets.

Many of the fund's holdings enjoy durable competitive advantages. Of the holdings Morningstar equity analysts cover, 69% by market value carried a Morningstar Economic Moat Rating of either wide or narrow at the end of February 2019, which was comparable to the category average.

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Alternatives

There is no shortage of ETFs offering exposure to European large-cap equities. Among those tracking the Stoxx Europe 600 Index, the best performers are iShares Stoxx Europe 600 (0.20% ongoing charge) and Amundi Stoxx Europe 600 (0.18%). The former uses sampling, while the latter uses synthetic replication.

Ongoing charges for market-cap-weighted Europe ETFs range from 0.07% to 0.35%, with Lyxor Stoxx Europe 600 ETF levying the lowest charge.

Investors can also consider ETFs tracking the MSCI Europe Index at ongoing charges of 0.15%-0.35%. With approximately 450 constituents, the MSCI Europe Index has a similar makeup to the Stoxx Europe 600 Index, except that it has a slightly higher tilt towards larger companies. The best-performing options are Amundi ETF MSCI Europe (0.15% ongoing charge) and Lyxor MSCI Europe ETF (0.25%). Both funds use synthetic replication.

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