This month's Featured Fund of the Month is Vanguard European Stock Index ETF
(VGK), which carries Standard & Poor's highest ETF ranking of “Overweight” as of November 9, 2010. Based on an evaluation of the underlying ETF holdings, Standard & Poor's classifies VGK as an Equity-International-Large Cap Value security.
S&P's analytical methodology for ETFs emphasizes the security's underlying holdings as part of analyzing various performance, risk, and cost considerations. S&P incorporates 10 analytical elements for ETF rankings. Six of the 10 analytical elements are proprietary to S&P, using either qualitative or quantitative approaches.
In selecting this month's Featured ETF, S&P screened for equity ETF securities outside the U.S. market with dividend yields above 3% and an overall S&P ETF ranking of overweight. Given the volatility in most equity markets throughout the world, the criteria also included an ETF that had underlying holdings with geographic diversity, stable revenue growth, and strong balance sheets with ample liquidity.
Most of VGK's underlying holdings are multinational companies. The security itself has total assets of $2.9 billion and average trading volume near 989,000, as of November 9, 2010.
S&P is positive on VGK because the security has above-average yield of 3.75% and its holdings are made up of what S&P considers attractive companies that historically have strong cash flows to support dividend growth. Many of these multinational companies derive an increasing share of revenue and profits from fast growing economies in developing markets.
Like many of today's equity ETFs, VGK is aimed at providing investment returns that are generally similar to those of the stocks in an equity index. In the case of VGK, BlackRock iShares says that this ETF is designed to track those stocks in the MSCI Europe Index. This ETF has an inception date of March 4, 2005 and it offers 56 million shares outstanding. The gross expense ratio for VGK is 0.16 which is well below its peer group in the 0.30 to 0.60 range.
VGK's assets consist of a diversified group of large-cap issues from developed countries in Europe. As of November 9, 2010, no individual stock represented more than 5% of total holdings. Nestle SA is the largest holding with 3% of the ETF's total assets.
The Top Ten Holdings are 19.2% of VGK's total assets, and include two stocks with S&P STARS rankings of Buy (****) and eight stocks with a Hold (***) ranking. All of the top-10 holdings are classified in the ETF's top-five industries, which are diversified banks, pharmaceuticals, integrated oil and gas, packaged foods and meats, and integrated telecom services. These represent 40.4% of the total ETF assets. In terms of sectors, the top five represented in VGK are financials, consumer staples, energy, health care, and industrials. These industry sectors are 66.0% of the ETF's total assets.
VGK has an overweight ranking for costs. The fund's ranking in this category benefited from a favorable low expense ratio and bid/ask spread that more than offset an average score for price to NAV measure. In the broader picture, Vanguard has been gaining market share from other ETF providers with its leading low cost position as evident by VGK's 0.16 gross expense ratio.
VGK has a marketweight ranking for the performance category. This reflects a below-average S&P STARS score for its underlying holdings, which reflect stock opinions from S&P equity analysts. VGK posted an average score for S&P Fair Value, an exclusive proprietary quantitative model, and above average for S&P Technical.
VGK has a marketweight ranking for this risk category. The ETF reflected average scores in the S&P Quality Rank, S&P Credit Rating, and standard deviation input. The S&P Quality Rank assesses the growth and stability of a company's earnings and dividends, while the S&P Credit Ratings are issued by S&P Ratings Services, a nationally recognized securities rating organization that operates independently of S&P Equity Research. VGK did not meet a defined threshold to support a score for S&P Risk Assessment, which is a qualitative measure from S&P equity analyst's view of a given company's operational risk.
VGK is one of approximately 135 equity ETFs on which S&P had an overall overweight ranking of November 9, 2010.
