Exchange traded fund investors who are seeking to diversify their equity portfolios should consider including relatively cheaper European stocks as the European Central Bank looks at adding quantitative easing, but people should mind currency risks.
For instance, the iShares MSCI EMU ETF (NYSEArca: EZU) and the SPDR EURO STOXX 50 (NYSEArca: FEZ) both focus on Eurozone countries. EZU shows a 15.8 price-to-earnings ratio and a 1.4 price-to-book while FEZ has a 15.2 P/E and a 1.4 P/B. In contrast, the S&P 500 index has a 17.6 P/E and a 2.5 P/B.
Looking ahead, if the European Central Bank enacts a full-blown quantitative easing program, similar to the size and scope of the Federal Reserve’s bond purchasing plan, Eurozone markets could experience a sizable rally. As monetary easing helps stimulate the economy, traders anticipate the expansion will translate to earnings growth in the Eurozone.
The European Monetary Union’s ECB will release its announcement next Thursday, December 4. [Ahead of ECB Meeting, Hedge Euro ETF Back in the Spotlight]
U.S. investors, though, will have to monitor currency risks when investing overseas, especially in Europe where a QE program would greatly depreciate the euro currency – a weak euro means that investors would generate lower U.S.-dollar-denominated returns. The euro currency has depreciated about 9.3% so far this year to $1.2475.
Nevertheless, ETF investors can utilize currency-hedged Europe funds that capture European markets while mitigating the negative effects of a depreciating euro currency or appreciating U.S. dollar.