European Country ETFs: All Over The Board

by on March 20, 2013 | ETFs Mentioned:

Clouds of uncertainty have plagued Europe since late 2009 as the region’s financially fragile state has taken its toll on investors’ confidence. While many of the currency bloc’s member nations have demonstrated great resilience in finding their way back to prosperity, economic powerhouses like Italy and Spain continue to pose a threat to the region’s financial stability [see our Euro Free Europe ETFdb Portfolio].

With more than 30 Europe ETFs to choose from, investors might be hesitant to dip their toes in country-specific markets overseas given the laundry list of woes plaguing the region. While the European landscape is undeniably volatile, a closer look at some of the biggest country-specific ETFs from the region reveals noteworthy standouts for those looking to take advantage of the lucrative upside potential at hand.

The various Europe ETFs out there are generally influenced by the same macroeconomic factors, however, they are far from identical. In fact, the differences from one Europe ETF to the next from a portfolio composition perspective can be significant, and likewise have a material impact on bottom-line returns [see 101 ETF Lessons Every Financial Advisor Should Learn].

Financials Allocation Can Be A Double Edged Sword European Central Bank

Europe’s financial sector boasts a rather infamous reputation among investors; this corner of the market has seen wild swings over the last few years as the global financial meltdown coupled with the region’s own debt crisis have put investors on a roller coaster. At the same time, the battered financials landscape has allowed many to profit by taking advantage of the rampant fear and panic selling.

As such, it’s worth analyzing how varying degrees of exposure to the financials sector have impacted country-specific ETFs from the region. While exposure to this sector is by no means the sole determinant of performance, it has had a major impact on returns given the sheer volatility that has swept through this corner of the market, both at home and abroad, over the last few years [try our Free ETF Country Exposure Tool].

The table below compares the trailing one-year and five-year returns among the seven biggest European country ETFs along with their respective allocations to the financials sector as represented by the size of each bubble:

  • MSCI Germany Index Fund (EWG, A)
  • MSCI UK Index Fund (EWU, A)
  • MSCI Switzerland Index Fund (EWL, A)
  • MSCI Italy Index Fund (EWI, C)
  • MSCI France Index Fund (EWQ, B+)
  • MSCI Sweden Index Fund (EWD, B+)
  • MSCI Spain Index Fund (EWP, B)

It’s important to keep in mind that the above chart is based on trailing returns, and as such, its composition is bound to change over time. Nonetheless, it is still valuable to see how the various degrees of exposure to the financials sector have affected each country; for example, EWD has benefited from its financials-heavy portfolio as this sector has staged a stellar rebound. On the other hand, EWP remains in negative territory from a longer-term perspective given Spain’s more dire budget issues [see Financials Free ETFdb Portfolio].

Of course, there’s no universally right choice from the above ETFs. For some bullish investors, a financials-heavy ETF makes sense in certain scenarios; for more conservative investors, a more balanced portfolio might be the way to go.

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Disclosure: No positions at time of writing.