The world sadly bid farewell to Great Britain's long-standing monarch Queen Elizabeth II. But England — and Europe, for that matter — have been a pain points for S&P 500 and ETF investors for years.
Europe is supposed to be a key part of a diversified portfolio. And yet it's been nothing but dead money. The $3.2-billion-in-assets iShares MSCI United Kingdom ETF has been a money-loser for as long as most investors can remember.
The U.K. ETF is down nearly 20% over the past 10 years, handing investors only pain in the past decade, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. And it's not much better in shorter time periods. The biggest U.K. ETF is down 13% in the past three years and is off more than 12% just this year.
And the outlook isn't looking much brighter. A serious slowdown in the British economy, weakness throughout Europe and a looming energy shortage all spell bad news for U.K. ETF investors.
"Russia's shutdown of the Nord Stream 1 gas pipeline threatens to further squeeze the disposable income of Europeans," said a report from Goldman Sachs. "A typical family in the EU could face energy bills of 500 euros per month by early next year without the introduction of price caps, according to Goldman Sachs Research — up 200% from 2021."
Pain Of U.K. And European ETFs
It's typical for most U.S. investors with moderate-risk portfolios to put at least 8% of their portfolios in foreign and European stocks. But they've been regretting that move for a long time.
The U.K.-focused iShares MSCI United Kingdom ETF lagged the U.S.-centric S&P 500 in the past three, five and 10 years — by a mile. The SPDR S&P 500 ETF Trust, for instance, is up 168% in the past 10 years on price appreciation alone. Meanwhile, in that same time, the iShares MSCI United Kingdom ETF is down nearly 20%.
And broadening your investment to include all of Europe isn't much better. The $1.5-billion-in-assets iShares MSCI Europe ETF, which owns companies in all of Europe, is up only 9.1% in the past 10 years.
Yes, it's true that European companies are paying a higher dividend yield than in the U.S. The iShares MSCI Europe ETF sports a 12-month yield of 4.42, vs. just 1.52% for the S&P 500, says Morningstar Direct. But returns are disappointing even with dividends included.
But the iShares Europe ETF returned just 3.89% annually in the past 10 years including dividends, says Morningstar Direct. That's a fraction of the S&P 500's 12.6% total annualized return in the past decade. U.K. stocks are even worse, with the iShares MSCI United Kingdom ETF returning just 1.94% annually in the past 10 years.
Getting More Diversification Benefit
But that's not to say owning European stocks is without merit. Historically, foreign stocks may zig when U.S. stocks zag. Owning at least some European stocks, in theory, can smooth out your portfolio's returns.
It's wise, though, to use ETFs to decouple currency factors. "The strong U.S. dollar has masked the relative benefits of international equity exposure," said Todd Rosenbluth, head of ETF research at VettaFi. When the U.S. dollar is strong, it subtracts from returns on European stocks for U.S. investors. "But investors could gain exposure to international equity ETFs that are currency hedged."
Rosenbluth points to Xtrackers MSCI EAFE Hedged Equity and iShares Currency Hedged MSCI EAFE as options for investors who want to own European stocks, but without the currency risk. "DBEF and HEFA have outperformed the unhedged (index) by approximately 1,000 basis points this year by reducing the impact of the weakness in the euro, the pound and the yen," he said.
Largest U.K.-Focused ETFs
Returns from British ETFs have been mostly disappointing, especially for long-term investors
| ETF | Symbol | YTD price change | 10-year price change | Assets (billions) | Expense ratio |
|---|---|---|---|---|---|
| iShares MSCI United Kingdom | -12.8% | -19.5% | $3.3 | 0.50% | |
| Franklin FTSE United Kingdom | -14.8 | N/A | 0.5 | 0.09 | |
| Invesco CurrencyShares British Pound Sterling Trust | -14.8 | -31.0 | 0.1 | 0.40 | |
| iShares MSCI United Kingdom Small-Cap | -34.5 | 7.6 | 0.05 | 0.59 | |
| First Trust United Kingdom AlphaDEX Fund | -32.5 | -9.0 | 0.04 | 0.80 | |
| iShares Currency Hedged MSCI United Kingdom | 2.8 | N/A | 0.02 | 0.50 | |
| SPDR S&P 500 ETF Trust | -16.9 | 168.0 | $370 | 0.09 |
