The ETF We're Watching Ahead of Europe's Big Day

The VGK ETF's year-to-date gain is roughly double that of the SPX

Jun 7, 2017 at 1:39 PM
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"Europe on Sale: Time to Buy Foreign Stocks," according to the May 13 cover story for Barron's (subscription required). The article notes that overseas markets are less expensive than the U.S., and "look ready to outperform" after the Great American Bull Market.

Against this backdrop, and ahead of a huge day both in Europe and the U.S. tomorrow -- courtesy of the European Central Bank (ECB), U.K. election, and fired FBI director James Comey -- we'll explain why we're watching the Vanguard FTSE Europe ETF (VGK), and take a look at the massive influx of euro bulls.

VGK ETF Has Skyrocketed in 2017

VGK -- which tracks major European markets -- has skyrocketed more than 24% since its mid-November low near $45, peaking at $56.99 on June 2 -- its highest point in nearly two years. Much of that advance stems from a bull gap in late April, as global stocks breathed a collective sigh of relief after the French elections. The surge pushed Vanguard FTSE Europe ETF shares above a trendline connecting lower highs since 2014, per Schaeffer's Senior V.P. of Research Todd Salamone, and VGK recently hit $57 -- the target for the inverse head-and-shoulders breakout that occurred in the first quarter, when the exchange-traded fund moved above $50.50.

Now, VGK boasts a year-to-date gain of more than 17%, about twice the S&P 500 Index's (SPX) 2017 gain of 8.6%. (That's not to say the SPX's performance in the first half of the year is anything but remarkable, though, as Schaeffer's Senior Quantitative Analyst Rocky White pointed out in his Indicator of the Week column.)

vanguard ftse europe etf vgk chart

Money Pouring Into European Equity Funds

The bullish attitude toward VGK is further demonstrated by the latest inflows data. According to BofA-Merrill Lynch, European equity funds have seen 10 straight weeks of inflows. Likewise, while investors pulled $1.6 billion out of U.S. ETFs in May -- the only group outside of commodities to see outflows last month -- $23 billion flowed into international ETFs, per In fact, Vanguard FTSE Europe ETF saw the fifth biggest ETF inflows in May

VGK Options Volume Explodes

As such, VGK options volume has exploded in 2017. Call open interest is at its highest point since July 2016, while put open interest has skyrocketed roughly tenfold since mid-November, peaking at nearly 119,000 contracts on May 19.

The top three open interest strikes are puts in the June series, led by roughly 15,400 contracts outstanding at the out-of-the-money June 47 put. The June 46 and 49 puts aren't far behind, with more than 10,000 contracts apiece. Against a backdrop of seemingly constant market-moving geopolitical events, it's possible VGK speculators have been picking up put options to hedge their bullish European equity exposure.

FTSE ETF options vgk
Chart courtesy of Trade-Alert

VGK now sports a Schaeffer's put/call open interest ratio (SOIR) of 2.72, indicating put open interest nearly triples call open interest among options expiring in the next three months. This ratio is in the 88th percentile of its annual range, suggesting near-term options players have rarely been more put-heavy on the ETF in the past year.

Euro Also Seeing Newfound Interest From Longs

The bullish interest in Europe isn't limited to ETFs, though. Per the latest Commitments of Traders (CoT) data, large speculators are now long the euro for the first time in about three years, and the extremity has surpassed the previous peaks in 2013 and 2014. In fact, this group hasn't held this many long euro positions since mid-2011. However, as Salamone points out, in previous instances when these large speculators are long, they've been wrong, with the euro headed lower. 

euro large speculators

At last check, the euro has dropped against a basket of its rivals, after Bloomberg said the ECB -- which meets tomorrow -- will slash its inflation forecast through 2019. On the flip side, the British pound was last seen slightly higher, despite uncertainty surrounding Thursday's snap election in the U.K., and the U.S. dollar was also flirting with modest gains ahead of highly anticipated testimony from ex-FBI head James Comey.

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