Is there any reason to buy an ETF based on an index which has been historically flat?
This year I started studying a bit of finance to understand better personal investments.
One of the most popular general advice for US based investors is to just buy and hold a low cost ETF fund based on an index like S&P500, which historically has an average return of about 8% (source)
If I want to adopt a similar strategy to invest on European markets, and I look at the historical charts of Euro Stoxx 50 or other European indexes, they are mostly negative or flat. If I assume (which can be wrong) that the future trend will be more or less the same, is there any reason to buy an ETF on these indexes?
I know that ETFs pay dividends. Are these dividends usually included on the overall index performance or must be computed separately?
I think that before choosing an ETF, I should choose an index to be tracked by the ETF. If the dividends are not included in the index performance, how can I understand the actual yield of an index in the long term?
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Historical return is not guarantee of future return
If you saw that European indices have returned poorly in the past, you cannot from this deduce they will return poorly in the future.
If stock price goes down, its return goes up, and vice versa
In fact, I would argue European stocks are a good investment because of the following. Let's assume a basket of companies pays dividend. If you need to pay to buy the basket, your dividend yield is 5%. If you need to pay to buy the basket, your dividend yield is 10%. 10% dividend yield is more return than 5%.
Stock prices have a reversion to the mean tendency
Not only is the dividend yield with European companies higher than with United States companies, stock prices tend to revert to mean which causes additional expected return. For example, let's assume that investors generally demand 5% dividend yield but in the European market the dividend yield just happens to be 10%. The basket of companies paying dividend costs in US but in Europe. There is in fact a very good chance that the basket costing in Europe will increase in value more than the basket costing in US. Thus, you get doubly more return: better dividend yield, and better price appreciation.
Conclusion: have an overweight in Europe and underweight in US
There is no crystal ball to say whether European stocks yield more or less in a given time interval than US stocks. However, European stocks have a better chance of yielding more. Thus, I would suggest you to buy more European stocks than most investors buy, and less US stocks than most investors buy.
Why not buy only European stocks, then? Because of diversification. For example, US markets have more consumer products and technology companies, whereas European markets have more industrial and financial companies. By buying only European stocks, you will have very serious underweight in the consumer products and technology sectors. So I'm not suggesting to buy only European stocks. I'm suggesting to have a slight overweight in Europe and a slight underweight in US.
Additionally: Prefer STOXX 600 to Euro STOXX 50
You want to have as good diversification as possible. The Euro STOXX 50 invests to only 50 large companies, and if I'm not mistaken, only in the Eurozone. Why would you want to limit yourself to only 50 large companies and to only Eurozone?
STOXX 600 in contrast invests to 600 companies so you will get exposure to smaller companies as well, and also invests to European companies not in the Eurozone.
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