2023-08-28 11:18:53 ET
Summary
- EWQ is a market-cap weighted ETF that provides exposure to French equities.
- Risks include the significant exposure to LVMH and the Industrials sector.
- Regardless, due to the lack of any competitive alternatives, it is the most cost-efficient way to gain exposure to France.
Thesis
iShares MSCI France ETF ( EWQ ) is an efficient index fund with a long track record that provides investors with exposure to France's equity market. While its expense ratio is quite high, it's the only fund that I think you should be considering if you want that exposure, taking into account the lack of competitive alternatives.
There seems to be an increased interest in EWQ recently. Surely, this recent outperformance had to turn heads:
There could also be some who believe this trend will continue and may be looking at the fund as a way to ride it. And that's fair. The purpose of this post is not to develop a thesis surrounding what may happen with French equities but to review the specific vehicle from the most essential aspects in order for investors to gain the conviction that this is the best one to express that thesis, if present.
Overview
Launch Date | Mar 12, 1996 |
Issuer | BlackRock, Inc. |
Manager | BlackRock Fund Advisors |
AUM | $922,834,644 |
Benchmark | MSCI France Index |
Goal | Tracking |
Holdings | 68 |
Market Cap Target | Mid/Large |
Weighting | Market-Cap Based |
EWQ is the largest U.S.-based ETF of its kind by assets under management. Issued by BlackRock, Inc. back in 1996, its goal is to capture the performance of the French equity market using a representative sampling technique to track the MSCI France Index.
Because of the orientation of the index towards Mid- and Large-cap companies, the index has a more concentrated portfolio than it'd have otherwise, currently at 67 stocks. It's also market-cap weighted to reflect the performance of the French market accurately.
Allocations
As you can see from the image above, EWQ is significantly exposed to the Industrials and Consumer Discretionary sectors. Of the 67 stocks in total, 17 belonged to the Industrials sector; so though the fund is overweight here, it's not a result of only a couple of names. We can say the same thing about the Consumer Discretionary holdings which are 11 right now in total.
Also, EWQ is very exposed to LVMH ( LVMUY ) with a 12.63% weight. That makes sense because it's by far the biggest company by market cap in the French market. You just may want to consider its current valuation as this would be a huge position in your portfolio if you bought EWQ.
Risks
For the usual full list of risks issuers note, you can examine the ETF's prospectus . Here, I would like to mention the ones that I found to be the most important for anyone who is looking to buy it:
- Market-cap weighting: The weighting methodology of EWQ may ensure that you have the most accurate exposure to the French market, but it also creates the risk of overpaying for each holding. By default, market-cap weighting follows a "buy high, sell low" strategy because it shifts assets towards stocks with rising prices and away from those with falling ones.
- Industrials and Consumer Discretionary exposure: While these two sectors are represented by a good number of stocks, you should keep in mind that these sectors in France come with unique risks that if realized may significantly impact your portfolio.
- LVMH exposure: Since this company is a giant when it comes to its market cap of approximately $420 billion and the rest in the ETF pale in comparison, the risks that come with owning shares in it are largely relevant to owning EWQ and should be considered.
Cost
Ticker | Expense Ratio | Turnover Ratio | Daily Volume |
EWQ | 0.53% | 9% | 264,744 |
FLFR | 0.09% | 4.87% | 405 |
And now we come to the first comparison. In regard to the cost of holding EWQ, it's the winner here. Franklin FTSE France ETF ( FLFR ) is another U.S.-based ETF that does the same job and though it charges a much lower expense ratio and its turnover for the last fiscal year was half that of EWQ, its trading volume negates these advantages in my view. I believe EWQ will prove the most cost-efficient to hold without having to worry about liquidity.
Performance
Now, let's take a look at the fund's performance starting from its efficiency in tracking the underlying index.
Since EWQ was launched, its returns have averaged 6.92% per year, with the benchmark increasing by an average of 6.94%. Considering that this performance is based on an almost two-decade track record and the expense ratio is so high, the ETF has done a good job. Even the after-tax and post-liquidation returns seem decent, considering.
As I already explained, only one more U.S.-based ETF is available that provides exclusive exposure to France; FLFR. Predictably, it has delivered the same returns since its launch in 2017, so there is not much to compare in terms of historical performance.
Verdict
In conclusion, with two possible routes for the exposure traders and investors are looking for now in France, EWQ is the only one that makes sense. Naturally, this is one of the rare times when I don't have any alternatives for different needs. FLFR's liquidity is quite scary to appreciate its extremely low expense ratio, even if you want to buy and hold for years.
Now, I would love to know your reasons for being interested in EWQ right now. So please, take the time to let me know in the comments; this can help me get better at considering different needs than mine and provide more relevant information, as well as various alternatives in the future. As always, thank you for reading.
For further details see:
EWQ: The Best Way To Access French Equities