ETFs for an Improving Europe

February 13th at 12:00pm by Tom Lydon

Investors are becoming braver and feeling more confident that the European debt woes that plagued the market last year are subsiding. Shares and exchange traded funds that track the European market have been trending higher on improved sentiment.

“Two things have changed for the better,” Russ Koesterich, global chief strategist for iShares, said. “The U.S. has clearly stabilized, and this has removed one of the risks to the global economy. The other is that the ECB has at least addressed the liquidity problems at the banks.” [VIX ETFs Bounce on Greek Jitters as Stocks Near 2011 Highs]

Last year’s sharp market declines have made European shares and ETFs look cheap this year. Jonathon Burton at WSJ.com reports that Europe-stock focused mutual funds had lost an average of 15% in 2011, while ETFs lost 17%, according to Morningstar data. [European Financial ETF is Contrarian Investment]

The benchmark MSCI Europe Index has recently been valued at 9.8 times estimated 2012 earnings, compared to an average of 17 times earnings over the past 25 years, according to MSCI data. Furthermore, dividend yields have shot up on companies of well-known European companies as share prices have waned.[Emerging Market ETFs Double S&P 500's Gain]

“It’s not a bad time to buy,” Koesterich said. “You’re getting a cheap valuation and a high dividend.”

Investing in Europe is not for the faint of heart at this point in time. The Greek bailout drama lingers and the future of the Eurozone is still uncertain. [Greece ETF Rallies on Bailout Speculation]

The fears of a European recession are not as intense as they were thanks to the ECB’s move to prop up distressed banks. Also, shares of multinational companies that are based in Europe but generate most of their revenue in other areas of the world  can help mitigate some risk of investing in Europe. Another way to mitigate risk and avoid intense volatility for a Europe focused investment is with an ETF.

The diversified portfolios and decent dividend yield are also attractive.

Various European-focused ETFs:

  • Vanguard European ETF (NYSEArca: VGK)
  • iShares EMU ETF (NYSEArca: EZU)
  • iShares MSCI Europe Financials Index (NYSEArca:EUFN)
  • iShares MSCI Germany Index (NYSEArca: EWG)
  • iShares MSCI France Index (NYSEArca: EWQ)
  • iShares MSCI Italy Index (NYSEArca: EWI)
  • PowerShares DB Italian Treasury Bond ETN (NYSEArca: ITLY)

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.