Financials Hurt, Industrials Helped VEURX in 1Q16

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Performance evaluation of the Vanguard European Stock Index Fund

The Vanguard European Stock Index Fund – Investor Shares (VEURX) fell 2.4% in 1Q16. This placed it in the middle of the pack of the 12 funds in this review. In the past one year, the fund has fallen 7.9%, putting it below average among its peers. Meanwhile, from the end of December 2015 until April 25, 2016, the fund has risen 2.4%. In the graph below, you can see its performance against two ETFs: the Vanguard FTSE Europe ETF (VGK) and the iShares MSCI Eurozone ETF (EZU).

Let’s look at what contributed to VEURX’s below-average performance in 1Q16.

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Portfolio composition and contribution to returns

We should state at the outset that unlike any of the other 11 funds in our review, VEURX isn’t actively managed. Its sectoral performance can give you an idea of the performance of the European stock market in general and its underlying benchmark, the FTSE Developed Europe All Cap Index, in particular. So this can serve as a broad benchmark to the performances of all other funds.

You may have noticed in the above graph that VEURX and VGK have very similar performances. This is because VGK is the ETF version of VEURX. It means they have the same portfolio composition for the most part. The only difference is that one is a mutual fund and the other is an ETF. The difference in performance is due to the lower fee charged by the ETF.

Financials was the biggest negative contributor to VEURX’s returns in 1Q16. HSBC Holdings (HSBC) and Barclays (BCS) drove down the sector’s returns. They had help from Credit Suisse Group (CS), Deutsche Bank (DB), and several others.

Healthcare helped financials drive down the fund’s returns. The sector contributed negatively due to stocks such as Novartis (NVS), Roche Holding (RHHBY), and AstraZeneca (AZN), among others.

Had it not been for positive contributions from the industrials and consumer staples sectors, VEURX would have done far worse in 1Q16. Siemens Aktiengesellschaft (SIEGY) was the biggest positive contributor from the industrials sector, while consumer staples was led by British American Tobacco (BTI).

Investor takeaways

We can’t analyze VEURX’s stock level composition since it’s an index fund. But we can say that it provides access to all sectors and major European securities. Its large asset size reflects the fact that lots of investors have taken the index mutual fund route to invest in European equities. If you want exposure to European stocks without having to worry about the issues related to active management, this fund could be a potential investment.

Let’s move on to the last Europe-focused mutual fund under review in this series: the Virtus Greater European Opportunities Fund – Class A (VGEAX).

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