The turmoil that has plagued U.S. equity markets over the last two years will no doubt have several lasting effects. Regulation of the financial sector has been permanently changed. The role of the government in the private sector has been escalated to levels never before imagined. And the wisdom of allocating nearly all of one’s portfolio to U.S. securities has come under heavy fire.
As U.S. investors look to diversify their holdings beyond their borders, many are looking to Asia, where some countries have already begun raising interest rates, to drive a sustained recovery. But a growing number of investors believe European stocks are also poised to rise rapidly over the next two years amidst a recovering economy, increasing corporate earnings, and a favorable monetary policy.
In The Wall Street Journal, Dave Kansas outlines a fairly straightforward investment case for Europe:
- Average price-to-earnings ratios are at about 16, down from a historical level in the low 20s in the 1990s
- Stocks are about 15% below their long-term average price-to-book ratio
- Dividend yields relative to government bond yields remain attractive
Moreover, while Asia’s swift recovery is likely to result in increased interest rates in the near-term, Europe faces strong headwinds that are likely to keep rates depressed for the next several quarters, a factor that could further stimulate growth.
Despite geographic proximity and a common currency, the fates of many European economies have been remarkably independent of each other. Spain, once home to a booming construction industry, has seen its economy collapse and could experience unemployment as high as 25% in coming years. Ireland has been another laggard, as the “Celtic Tiger,” spurred by low corporate taxes and improved educational infrastructure, now seems far less fierce. Even the UK faces significant risks, as large government stakes in financial giants Royal Bank of Scotland and Lloyds Banking Group make investors a bit uneasy.
ETF Plays On Europe
In addition to a line of country-specific ETFs from iShares, there are several funds offering diversified exposure to the Euro zone area (see our Europe Equities ETFdb Category for a complete list):
- Vanguard European ETF (VGK): With an expense ration of 0.18% and more than 480 individual holdings, VGK offers cheap, diversified exposure to European equity markets. VGK’s largest holdings are global firms such as HSBC, BP, and Nestle, but the depth of holdings also offers some exposure to mid cap and small cap firms.
- iShares S&P Europe 350 Index Fund (IEV): This ETF is similar in many respects to VGK, as the two ETFs have approximately the same number of individual holdings a nearly identical list of top ten holdings. IEV, however, has an expense ratio of 0.60%, well above VGK’s expenses.
- SPDR DJ EURO STOXX 50 ETF (FEZ): This ETF is more concentrated on big name companies than VGK and IEV, having less than 60 individual holdings. The stocks held by FEZ, however, are well diversified across both country and sector, providing relatively balanced exposure to European equities. Recently, FEZ was trading at a forward price-to-earnings ratio of less than 13 and had a dividend yield of 3%, making this ETF an attractive option for investors looking for value plays.
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Disclosure: No positions at time of writing.