Despite the recent slight correction in European equities on concerns of the U.S. Fed scaling back its bond purchasing program, investors’ faith in European equities seems to be unshaken. All the major indexes including the leading blue chip index for the Euro zone – EURO STOXX 50 Index – are trading near five-year highs (read: 3 European ETFs Leading the Recovery).

Although the European economy grew at 0.1% in the third quarter, modestly below the growth of 0.3% in the second quarter, both business and consumer sentiments are riding high.

The Economic Sentiment Indicator (ESI) score for the Euro zone rose 0.8% to 98.5 in November, signaling the region’s steadily rising confidence.

Meanwhile, the Purchasing Manager’s Index (PMI) score (as calculated by Markit) for the Euro zone was also encouraging at 51.7 for the month November. Though the figure was a tad below October’s figure of 51.9, it was still above 50 representing growth.

Admittedly, the picture is not so rosy for Euro zone’s second largest economy, France. Its economy shrank by 0.1% during the third quarter of this year. Moreover, its ESI score fell 0.9% to 95.2 and the PMI score dropped to a 5-month low.

Investors still have cause to cheer about as Euro zone’s largest economy – Germany – is witnessing both rising business and consumer sentiment. Moreover the PMI score for Germany for the month of November stood at 55.4, the highest figure in two and a half years.

Also, the weaker economies within the Euro zone, including Spain, Italy and Portugal, are witnessing improved economic activity within their counties and are gradually recovering from the crises. Adding to the bullish sentiment, Ireland emerged as the first country to exit from the bailout package for the region. The economy is consistently showing strength.

Moreover, to further support the recovery within the Euro zone, the European Central Bank (ECB) recently loosened its monetary policy by cutting its benchmark rate to a record low of 0.25% (read: Euro ETFs in Focus After Surprise ECB Rate Cut).

Leading Analysts Prediction

If this wasn’t enough, surely investors would be thrilled by prediction for the upcoming year by some of the world’s leading investment bankers. Market experts predict this continent’s equities to rise by double-digits, outpacing the rise in U.S. equities.

Moreover, ECB now expects the European economy to grow at 1.1% in 2014, slightly higher than its earlier prediction of 1%.

Based on the improving fundamentals and projections, European stocks and the related ETFs are seeing huge fund inflows. For investors interested to participate in the recovery, a focus on top ranked Europe ETFs could be a less risky way to tap some of the broad growth trends. Hence, a look at the top ranked ETF in Europe could be a good idea, especially by using our Zacks ETF Ranking system.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (Read: Zacks ETF Rank Guide).

Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely, Low, Medium or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the European equities space, we have taken a closer look at the top ranked FEZ. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ (read: all the Top Ranked ETFs) and is detailed below:

SPDR EURO STOXX 50 ETF (FEZ)

This fund follows the EURO STOXX 50 Index, which measures the performance of some of the largest companies across the components of the 20 EURO STOXX Supersector Indexes. With an asset base of over $4.5 billion, the fund is considered to be one of the largest European ETFs.

The product holds a small basket of 55 securities and is pretty liquid with an average daily volume of a little under two million shares a day. The ETF charges 29 bps in fees per year from investors, which is pretty cheap compared to its peers.

 It is primarily tilted towards large cap securities and puts nearly 39% of total assets in the top 10 holdings. Total SA (5.3%), Sanofi (4.86%) and Bayer (4.3%) are the top three elements in the basket. In terms of style box, the fund is primarily devoted to value stocks (50%), while growth stocks account for 34% of the portfolio and 16% of the stocks have both these characteristics.

The ETF is skewed towards financials, as it takes roughly one-fourth of the total assets, while industrials, healthcare and consumer staples capture the next three spots.
 
In terms of country allocations, France and Germany are leading with 35.88% and 33.30% share, respectively, followed by Spain (12.36%), Italy (7.56%), the Netherlands (7.16%), Belgium (2.99%) and Ireland (0.70%) (read: Is the France ETF in Trouble?).
 
The product has returned around 24% year to date and 32.7% in the last one year.

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ISHARS-EMU IDX (EZU): ETF Research Reports
 
SPDR-EU STX 50 (FEZ): ETF Research Reports
 
VANGD-FTSE EUR (VGK): ETF Research Reports
 
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