As we look to the second half, investors can still consider an overweight position in European equities and region-related exchange traded funds, even with the ongoing Greece risks.
“We are overweight in the eurozone,” according to a recent BlackRock research note. “Despite giving back some of this year’s strong results as interest rates shot higher across the continent, we look for modest outperformance of eurozone equities over the balance of 2015.”
The money manager argues that the market will slowly strengthen as the European Central Bank’s commitment to quantitative easing will help bolster the economy. [Improving Business Growth Helps Sustain Eurozone ETF Gains]
Moreover, after the recent pullback, European equities are now “modestly cheap” compared to U.S. stocks and offer better expected earnings revisions.
For broad Europe exposure, investors can take a look at the iShares Core MSCI Europe ETF (NYSEArca: IEUR), which tries to reflect the performance of the MSCI Europe Investable Market Index, and iShares Europe ETF (NYSEArca: IEV), which tracks the S&P Europe 350 Index. Both IEUR and IEV both follow a similar group of European companies, but IEUR comes with a significantly cheaper 0.14% expense ratio. IEUR is trading at a 17.0 price-to-earning and IEV shows a 16.9 P/E, whereas the S&P 500 index has a 18.6 P/E.
Additionally, the iShares MSCI EMU ETF (NYSEArca: EZU) takes a more focused view, following European Monetary Union markets, which exclude the United Kingdom and Switzerland. EZU has a 16.6 P/E.
With the ECB engaging in loose monetary policies and quantitative easing, the euro currency could continue to depreciate against U.S. dollar. Consequently, investors could take a look at euro-hedged options that diminish currency risks.
“Consider currency hedged exposure, given continued strength in the U.S. dollar could erode returns in foreign markets (such as Europe) for dollar-based investors,” BlackRock said.
For example, investors interested in Europe but are concerned about a depreciating euro currency can take a look at euro-currency hedged iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU), which tracks EZU except it includes forward contracts to hedge against a weaker euro. Alternatively, investors can also look at other options, including the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) and Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ).
The Greece bailout drama, though, remains a near-term risk. However, BlackRock argues that the small country should not taint the overall investment case the Eurozone. [Now This: Greece ETF Contends With S&P Bank Downgrades]
For more information on the Eurozone, visit our Europe category.
Max Chen contributed to this article.