For U.S. investors who are worried that domestic stocks are overheated and have gotten too expensive, the iShares Core MSCI Europe ETF (IEUR) offers a compelling and inexpensive alternative, or complement, to the S&P 500 (SPX). I’m bullish on this $4.8-billion Europe-focused fund from BlackRock’s iShares based on the relatively inexpensive valuation of its portfolio, its diverse exposure to an all-encompassing range of European stocks, its solid dividend yield, and its favorable expense ratio.
These factors all make IEUR an interesting investment opportunity in its own right but also make it a great option to include alongside U.S. stocks for investors who want to diversify their portfolios and add exposure beyond the domestic U.S. market.
What Is the IEUR ETF’s Strategy?
According to iShares, IEUR “seeks to track the investment results of an index composed of large-, mid-, and small-capitalization European equities.” The fund gives investors “Exposure to a broad range of European companies.”
Exposure to Over 1,000 European Stocks
IEUR offers investors remarkably diversified exposure to European stocks. The fund holds an incredible 1,003 stocks, and its top 10 holdings make up just a minuscule 19.3% of assets, so there is virtually no concentration risk for investors to worry about here. You can take a look at an overview of IEUR’s top 10 holdings below, using TipRanks’ Holdings tool.
IEUR is well-diversified by both industry and geography. In terms of sector, financials account for the fund’s largest weighting at 19.2%, followed by industrials at 18.0%, health care at 15.0%, and consumer staples at 10.2%. Meanwhile, information technology accounts for a weighting of just 7.2%. This is in stark contrast to the S&P 500 – for example, tech stocks have a massive weighting of 32.1% in the iShares Core S&P 500 ETF (IVV).
Breaking it down geographically, IEUR is also well-diversified. The fund’s largest exposure is to the U.K., which accounts for just under a quarter of assets with a weighting of 23.7%. After that, France has a weighting of 16.1%, Switzerland has a weighting of 14.5%, and Germany accounts for 13.3%. No other country accounts for a double-digit weighting within IEUR.
Inexpensive Valuation
One thing that I really like about IEUR and its portfolio is that it is quite inexpensive, especially when compared to U.S. stocks. At a time when many investors are concerned that the U.S. market is trading at an elevated valuation (the S&P 500 trades at an above-average valuation multiple of 25 times earnings), IEUR offers an appealing valuation of just 15.2 times earnings (as of October 30).
This collectively modest valuation should also give IEUR a bit more downside protection than the S&P 500, as well as some additional room for upside via a multiple expansion. Ultimately, this inexpensive valuation makes IEUR a cheaper alternative to the S&P 500 or, even better, a useful complement to it for investors to include in their portfolios.
And just because IEUR’s holdings are cheap doesn’t mean that it is a portfolio of boring stocks — top holding Novo Nordisk (NVO) is at the cutting edge of weight loss drugs, while IEUR’s second-largest position ASML Holding (ASML) makes the high-tech manufacturing equipment used in the semiconductor manufacturing process, making it a crucial linchpin in the global economy.
Strong Dividend
IEUR also offers an attractive dividend yield of 3.0%. While this might not necessarily be an eye-popping yield, it’s important to note that it’s more than double the yield of the S&P 500, which currently yields just 1.3%. IEUR has paid dividends to its holders each year since its inception in 2014.
Favorable Expense Ratio
IEUR charges a very reasonable expense ratio of just 0.11%. This means that an investor putting $10,000 into IEUR will pay just $11 in fees on an annual basis. The savings from a low expense ratio like this really add up over time. Assuming that the fund returns 5% on an annual basis going forward, this same investor will pay just a negligible $62 in fees over a five-year period.
This is a great expense ratio in general, and it stands out as particularly cheap for an international ETF, as these are typically more expensive than U.S. ETFs.
Evaluating IEUR’s Performance
The one downside to IEUR is that it has underperformed the S&P 500 in recent years, which is perhaps unsurprising as European stocks have lagged behind their U.S. peers.
IEUR’s annualized five-year total return of 9.0% (as of September 30th) is certainly respectable, and it has made money for its holders, but it lags behind the return of the aforementioned iShares Core S&P 500 ETF, which has returned 15.9% on an annualized basis over the same time frame. Furthermore, IEUR’s annualized 10-year total return of 5.9% (as of September 30) lags the return of its S&P 500 counterpart by a larger margin — IVV has returned 13.3% on an annualized basis over the same time period.
While it has underperformed the S&P 500, this is part of what makes IEUR a buying opportunity today. Investors can buy IEUR at a significantly lower valuation than the S&P 500, and if the gap in multiples between IEUR and the S&P 500 compresses, IEUR could outperform going forward. Plus, investors can own IEUR in addition to S&P 500 stocks, so it’s not an “either-or” decision.
Is IEUR Stock a Buy, According to Analysts?
Turning to Wall Street, IEUR earns a Moderate Buy consensus rating based on 601 Buys, 357 Holds, and 45 Sell ratings assigned in the past three months. The average IEUR stock price target of $65.71 implies 15.1% upside potential from current levels.
A Great Complement for U.S. Investors
There’s a lot to like about IEUR. I’m bullish on it based on its attractive dividend yield, its investor-friendly expense ratio, and, ultimately, its inexpensive and diversified portfolio of European stocks. This positioning makes it a strong alternative or complement to the S&P 500 and large-cap U.S. stocks for investors who want to diversify beyond their home market at a time when the S&P 500 is trading at 25 times earnings and yielding just 1.3%.
