After a year of seeing headline news of an impending European Union financial implosion, many investors are avoiding the region like the plague. Eurozone assets have become considerably devalued, but they are making a comeback as European officials commit to containing the runaway deficits. Meanwhile, exchange-traded fund investors now have the opportunity to gain exposure to the improving economies.
Better investor sentiment and improved market conditions are drawing investors out of their holes. Individuals are starting to shift money out of their money-market and fixed-income holdings and bringing it back to equities. A lot of money is still sitting on the sidelines, and when they make their way back into the equities market, global stocks will see a resurgence. However, many observers have yet to make up their minds on Europe, especially with the ongoing Greek concerns.
Still, many investors would rather move beyond the incessant Greek tragedy, focus on central bank decisions on the looser monetary policies, which would boost demand for riskier assets, and look for improved corporate earnings, notably in manufacturing and consumer spending. Observers are impatiently waiting on the European Central Bank's next provision and the Bank of England's Quantitative Easing measures. Many expect further interest rates cuts as inflationary pressures have mostly subsided and the lower economic outlook would merit additional easing monetary policies.
Knowing this, investors have the opportunity to gain exposure to the potential benefits of the improving financial system in Europe through ETFs that provide exposure to the region. While the future is never certain and potential risks abound, ETF investors could capture the large upside to the gradual resolution.
The "Troubled" Europe ETF Options
Investors may gain exposure to Spain's market through the iShares MSCI Spain Index Fund ETF (EWP). The fund's top two sector allocations are in financials at 42.3% and telecommunications services at 20.0%. In addition, the top two holdings are also a bank and telecom company, Banco Santader SA at 20.6% and Telefonica SA at 20.0%. The country is going forward with extensive labor law reforms that should help the government diminish its public deficit and strengthen any structural weaknesses in the economy. With the fund still 4.6% below its 200-day exponential moving average, EWP still has some ways to go before establishing a solid foothold. Additionally, dividend seekers may also enjoy the European country-specific ETFs' dividend yields. The Spain ETF currently shows a 12-month yield of 9.52%. EWP has an expense ratio of 0.52%.
The iShares MSCI Italy Index Fund ETF (EWI) holds publicly traded stocks in the Italian market. Potential investors should also be mindful of the 30.7% allocation in financials and the 30.2% weighting in energy. EWI is 1.6% below its 200-day exponential moving average. For example, energy firms ENI SPA and ENEL SPA make up 21.6% and 10.6% of the fund, respectively, followed by 8.9% in Unicredit SPA. The Italy ETF has a 12-month yield of 4.36%. EWI has an expense ratio of 0.51%.
The iShares MSCI Ireland Capped Investable Market Index Fund ETF (EIRL) follows the performance of equities on the Irish stock exchange. While the country has been lumped with other troubled financial E.U. states, the economy has done better than that of Greece or Portugal. The fund's largest sectors weightings are in materials 26.8%, consumer staples 22.9% and industrials 20.5%. The financials sector makes up a smaller portion at 8.2%. The two largest component holdings are CRH Plc at 21.3% and Elan Corp Plc at 12.9%. It should be noted that the ETF is trading 8.8% above its 200-day exponential moving average. EIRL is on a positive uptrend, but the fund offers a lower 12-month yield of 2.0%. The ETF has a 0.59% expense ratio.
The Global X FTSE Greece 20 ETF (GREK) is a more recent addition to the ETF universe, launched early December. The fund offers a pure play on a portfolio of Greek companies. With Greece coming to terms on reducing public spending, the country has met the preconditions to receive its much needed bailout, averting a broad default. The GREK ETF has shown a phenomenal performance, jumping 37% year-to-date, as the market anticipated a favorable outcome to the debt talks. The fund's largest sectors include financials, consumer discretionary and consumer staples. GREK has an expense ratio of 0.55%.
Lastly, the iShares MSCI Europe Financials Sector Index Fund ETF (EUFN) provides exposure to the financial sector of the European markets. With the overall financial debacle more or less subsiding, we may begin to see normalization in the sector as investors move away from fear trading. The fund has moved 3.0% above its 200-day exponential moving average. EUFN has a 3.5% 12-month yield and an expense ratio of 0.48%.