VGK: There’s Much to Like about This Europe ETF

European stocks don’t always get the same love as their U.S. peers, but there is a lot to like about the Vanguard FTSE Europe ETF (NYSEARCA:VGK), which has gained momentum with a 17.7% gain over the past six months. It gives investors exposure to 1,295 European stocks, which are still cheap compared to U.S. stocks and offer higher dividend yields.

I’m bullish on VGK based on its inexpensive valuation, attractive dividend yield, diversified exposure to a surprisingly exciting group of European stocks, and low expense ratio.

This isn’t to say that European stocks are necessarily better than U.S. stocks, but for investors who have been overlooking the Old Continent, the present looks like a good time to diversify one’s portfolio and add some exposure to European stocks as a complement to their U.S. holdings. 

What Is the VGK ETF’s Strategy?

According to Vanguard, this $19.5 billion ETF “seeks to track the performance of the FTSE Developed Europe All Cap Index, which measures the investment return of stocks issued by companies located in the major markets of Europe.”

VGK holds stocks from a wide variety of European countries, including Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

A Diversified and Quietly Exciting Portfolio

VGK provides investors with incredible diversification. The ETF owns 1,295 stocks, and its top 10 holdings make up a mere 20.0% of assets. Below, you’ll find an overview of VGK’s top 10 holdings from TipRanks’ holdings tool.

As you can see, pharmaceutical giant Novo Nordisk (NYSE:NVO) is the fund’s top holding, with a weighting of 3.1%. This also shows that VGK is less concentrated than the S&P 500 (SPX), where top holding Microsoft (NASDAQ:MSFT) makes up a much larger 7.2% weighting in the Vanguard S&P 500 ETF (NYSEARCA:VOO). 

While the U.S. has rightfully earned a reputation as a hub for innovative technology stocks, Europe quietly has its share of exciting and innovative companies as well, and they shouldn’t be overlooked.

For example, top holding Novo Nordisk is a leader in the hot field of weight loss and weight management drugs (and is up 70% over the past year based on investor excitement about this class of drug), and ASML Holding (NASDAQ:ASML) provides the equipment and machinery used to manufacture semiconductors, one of the market’s hottest sectors. ASML is up 48.9% over the past year.  

ASML is joined in VGK’s top 10 holdings by one of its fellow European technology stocks, enterprise software firm SAP AG (NYSE:SAP), which has quietly racked up an impressive 60% gain of its own over the past year.

Notably, Novo Nordisk has a ‘Perfect 10’ Smart Score, and SAP scores a 9 out of 10. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating. These stocks are joined by energy major Shell (NYSE:SHEL), another top 10 position with a 9 out of 10 Smart Score.

Other prominent top holdings include legendary luxury goods conglomerate LVMH Moet Hennessey (OTC:LVMUY) and additional healthcare names like Novartis (NYSE:NVS), AstraZeneca (NASDAQ:AZN), and Roche (OTC:RHHBY). 

Historically Favorable Valuations

A key advantage to investing in VGK is that it is substantially cheaper than the S&P 500. While there are some impressive companies here that have been posting stellar performances, for the most part, European stocks are still much cheaper than their U.S. counterparts. In fact, according to Morgan Stanley (NYSE:MS), the gap between the valuations of U.S. stocks and European stocks recently hit an all-time high.

While the S&P 500 currently trades at a valuation of 23.5 times earnings, VGK’s average price-to-earnings multiple is much lower, at 13.9 times, potentially giving investors some downside protection and more room for upside.  

An Attractive Dividend Yield 

In addition to trading at a much lower multiple than the S&P 500, VGK is also attractive in that it sports a much higher dividend yield than the S&P 500. In fact, VGK’s dividend yield of 3.2% is more than double the 1.4% dividend yield offered by the S&P 500. Moreover, VGK has been paying a dividend to its holders for 16 years in a row. 

A nice thing about VGK’s dividend payout is that while many European stocks pay their dividends on an annual or semiannual basis, VGK pays its dividends on a quarterly basis. 

Investor-Friendly Expense Ratio 

VGK is also attractive because it is an extremely cost-effective ETF to own. Vanguard pioneered the idea of low-cost index ETFs, and it is thus unsurprising that VGK offers an investor-friendly expense ratio of just 0.09%. This means that an investor allocating $10,000 into the fund will pay just $9 in fees on an annual basis.

This can really help investors save money and preserve the values of their portfolios over time. Assuming the fund returns 5% per year going forward and maintains this expense ratio, this same investor will pay just a mere $115 in fees over the course of the next 10 years. 

Is VGK Stock a Buy, According to Analysts?

Turning to Wall Street, VGK earns a Moderate Buy consensus rating based on 647 Buys, 567 Holds, and 82 Sell ratings assigned in the past three months. The average VGK stock price target of $84.17 implies 24.8% upside potential.

The Takeaway: Make Room for Europe

Despite gaining momentum and performing well over the past year, European stocks are still considerably cheaper than their U.S. counterparts and offer higher yields. It’s not to say that VGK will necessarily outperform U.S. stocks, but it’s not a bad idea for U.S. investors to consider gaining exposure to Europe, given these factors. 

I’m bullish on VGK based on its relatively cheap valuation, 3.2% dividend yield, diversified exposure to European stocks, favorable expense ratio, and the high potential upside that Wall Street analysts ascribe to it. 

Disclosure