A comprehensive European stock portfolio.

fundcoverage@morningstar.comVGK
by Daniel Sotiroff
3/28/2019
Vanguard FTSE Europe ETF VGK

Vanguard FTSE Europe ETF is a compelling strategy way to invest in European stocks. This low-cost, comprehensive portfolio earns a Morningstar Analyst Rating of Silver.

The fund tracks the FTSE Developed Europe All Cap Index, a broad benchmark that includes stocks of all sizes from 16 developed European countries. It weights its holdings by market capitalization, an approach that benefits investors by capturing the market’s consensus opinion of each stock’s value while mitigating turnover and trading costs. Markets usually get long-term prices correct, but they occasionally make mistakes. Investors can drive valuations up if they get excited about a particular area of the market, and market-cap-weighting will increase the fund’s exposure to it.

This extensive portfolio accurately represents the European stock market and captures the entire opportunity set that is available to its active competitors. It modestly favors stocks listed in the U.K. and Switzerland relative to the category norm, but these differences shouldn’t drive significant gaps in category relative performance. The remainder of its geographic and sector weightings look similar to the category average. Stocks from the U.K. and Switzerland account for 27% and 14% of this fund, respectively, while those from eurozone countries collectively represent an additional 48%.

The fund’s total return was on par with the category average from its launch in June 1990 through February 2019. But its risk-adjusted performance fared a little better. The better performing actively managed funds in the category were able to improve their performance by overweighting smaller stocks.

The fund’s low expense ratio is its greatest advantage. Vanguard charges only 0.09% annually for this offering, which should continue to give it an advantage over its more expensive peers.



Portfolio Construction

This broad, market-cap-weighted portfolio accurately represents the investable European market in a cost-conscious manner, so it earns a Positive Process Pillar rating. The managers use near full replication to track the FTSE Developed All Cap Ex U.S. Index. The benchmark starts with all publicly listed stocks from 16 developed European countries, and it sorts them by their free float adjusted market capitalization. It trims this universe down to those that rank in the top 98% by market capitalization and employs buffering rules around the cutoff point to help mitigate turnover. The index applies some additional liquidity screens to ensure its final constituents are investable. It weights final holdings by market capitalization, which emphasizes large multinational firms while keeping turnover and the associated trading costs in check. The index reconstitutes semiannually in March and September.

Fees

Vanguard offers this fund through two low-cost share classes, and it earns a Positive Price Pillar rating. In November 2018, Vanguard closed the Investor share class and lowered the investment minimum on the Admiral share class to $3,000 from $10,000 ($3,000 was the minimum for the outgoing Investor share class). The Admiral shares cost 0.10% while the ETF’s fee is 0.09%. Both expense ratios rank among the lowest fees in Morningstar’s Europe stock category. The Admiral shares led the fund’s target index by 10 basis points annually over the trailing three years through February 2019. Securities lending revenue helped the fund recover some its expenses, but investors should not expect this activity to produce long-term index-beating returns.

S&P 500 index data: S&P 500 Copyright @ 2019

All data from Morningstar except U.S. intraday real-time exchange quotes, which are provided by BATS when available. End-of-day quotes for Nasdaq, NYSE, and Amex securities will appear 15 minutes after close. Graph times are Eastern Standard. @ Copyright 2019 Morningstar, Inc.