ETF Plays For The End Of Europe’s Recession

by on November 16, 2009 | ETFs Mentioned:

Thanks to strong economic recoveries in Germany and France, the 16-country euro zone has now officially exited its worst recession in a half century. According to data released on Friday, the euro zone grew by 0.4% in the third quarter, compared with a 0.2% decline in the second quarter. Although the news strengthened hopes of a sustained global recovery, many European economies continue to contract, facing strong headwinds on their recovery track.

Brussels, Home of European ParliamentWhile the official end to the recession is welcome news, the economic woes of the continent have not disappeared altogether. Several nations, most notably England, Ireland, and Spain, remain mired in pronounced and prolonged downturns. Even in Germany, which posted a 0.7% gain in GDP, unemployment is expected to increase as the government eases off of programs that have subsidized short-hours shifts at German companies. Last week, Chancellor Angela Merkel warned that “the problems will become bigger before things get better,” anticipating that the German economy will face significant challenges through 2010.

Spain also faces significant challenges, as the once-booming construction-heavy economy has collapsed, and the jobless rate now stands at almost 20% (with youth unemployment at a staggering 40%). The UK and Ireland continue to see declines in economic activity, with some expecting a rough road for the foreseeable future.

ETF Plays On Europe

Country ETF
Germany EWG
UK EWU
Spain EWP
France EWQ
Switzerland EWL
Sweden EWD
Austria EWO
Italy EWI
Netherlands EWN
Belgium EWK

For investors looking to gain exposure to European stock markets, the options are plentiful. iShares offers nearly a dozen single-country funds focusing exclusively on developed European economies. And last week the company launched the MSCI Emerging Markets Eastern European Index Fund (ESR), an ETF investing in developing economies such as Russia, Poland, the Czech Republic, and Hungary.

For investors looking to gain diversified exposure to developed Europe, there are a number of funds that spread their holdings around (see a complete list of European Equities ETFs). ETFdb Pro members can read more about both single-country ETFs and diversified European ETFs in our ETFdb Category Report (if you’re no a Pro member yet, you can sign up for a free trial or read more here).

  • Vanguard European ETF (VGK): The cheapest way to gain exposure to European equities through ETFs (an expense ratio of just 18 basis points), VGK holds nearly 500 individual stocks. This ETF has allocations to 16 countries, with weightings in the UK, France, and Germany being the largest. VGK is up almost 35% year-to-date.

VGK

  • WisdomTree Europe Small Cap Dividend Fund (DFE): The index underlying this ETF is a fundamentally-weighted benchmark that determined weightings based on cash dividends paid. As of November 13, this index had a price-to-cash flow ratio of under 14, indicating a tilt towards value stocks. Unlike most European ETFs that invest in large cap firms (such as Nestle and HSBC), more than 95% of the underlying index includes small cap stocks with a total market capitalization of less than $2 billion.

DFE

  • SPDR DJ Euro STOXX 50 ETF (FEZ): This ETF offers exposure to large cap European companies, as the 55 components have a weighted average market capitalization of more than $70 billion. This fund has a tilt towards the financial sector, including big allocations to Spain’s Banco Santander (6.0%) and France’s BNP Paribas (3.6%).

FEZ

Disclosure: No positions at time of writing.