by Jeff Reeves | September 18, 2013 9:18 am
A year or two ago, investing in Europe would have been seen as the ultimate gamble.
Across 2011 and 2012, Europe was plagued with high sovereign debt levels, continued recession and joblessness and a general downward dive in equities. But now that Europe has exited recession at long last and economic indicators are firming up, investors have good reason to look across the Atlantic.
So if you’re interesting in buying the Europe recovery, here are a few methods to consider — including pure-play stocks and ETFs as well as diversified funds that cast a wider net to limit your risk.
If you have a 401k and have limited options, or if you simply prefer to err on the side of diversity, there are a number of Europe funds looking good in both the ETF space and among Europe mutual funds.
Fidelity Worldwide Fund (FWWFX) has about $1.3 billion in total assets under management. This mutual fund is allocated about 50% in U.S. stocks, with top holdings that include Google (GOOG) and Citigroup (C), but the rest of the portfolio is spread around the world — 30% in Europe, almost 10% in Japan and the rest everywhere from Canada to Hong Kong. This is a good way to hedge your bets but get a significant footprint in Europe. FWWFX is up 20% year-to-date to outperform the S&P 500.
In the ETF space, the iShares MSCI EAFE ETF (EFA) is another good option. EAFE stands for Europe, Asia and Far East, so you lose the U.S. exposure but add more weight elsewhere. Right now 21% of the EFA ETF is in Japan, but about two-thirds is focused in Europe and the U.K. Top holdings include Swiss consumer giant Nestle (NSRGY) and London-based bank HSBC (HBC).
The largest dedicated Europe ETF by assets is the Vanguard FTSE Europe ETF (VGK), with $13 billion under management. This fund is a great option because it provides a focus on Europe but doesn’t tie you to a single company, sector or national economy. Top holdings right now include oil giant Royal Dutch Shell (RDS) as well as Nestle and HSBC. Best of all, the expenses are super low; the VGK fund charges just 0.12% in expenses or a measly $12 a year on every $10,000 you invest.
Mutual funds also allow dedicated Europe exposure — including the JPMorgan Intrepid European Fund (VEUAX) as one example. VEUAX has outperformed in 2013 with 21% returns since January 1, but keep in mind it has gross expenses of 1.74% and only around $63 million in assets. You’re more likely to find smaller expenses and bigger funds in the ETF space should you want to play Europe.
For those who want to take on a bit more risk, there are country-specific ETFS offered by iShares — including the iShares MSCI Germany ETF (EWG) if you want to play the countries that are a bit more stable as well as the iShares MSCI Spain Capped ETF (EWP) if you want to delve into the countries that are on shakier ground.
Just keep in mind that the European economy is led by the big dogs like Germany and the U.K. That’s a double-edged sword, of course. A pure play on Germany will allow for greater stability … but also less of a snap-back should the EU economy surge forward in the next year or two. Conversely, buying a troubled region like Spain could result in huge losses should things sour, or it could bring big gains if the battered economy makes a run.
Tread lightly either way, because the more you move away from diversification geographically, the bigger your risk becomes.
Speaking of moving away from diversification: If you’re really bullish on Europe and feel comfortable in your research skills, individual European stocks could be a wise bet.
One example of a turnaround play worth considering is German industrial giant Siemens (SI). The company has been battered for a number of reasons, including the global downturn and its Europe exposure, but the negativity seems priced in; Siemens shares are down up roughly 8% year-to-date and the company warned a few months ago that it would miss its 2014 earnings forecasts … so at worst the stock moves sideways and delivers a 3.4% dividend.
Another cyclical play would be European banks in healthier nations like Switzerland. Credit Suisse (CS) and UBS (UBS), as well as some U.K. banks like Lloyd’s (LYG), have done quite well this year and dramatically outperformed both U.S. and European stock market indices. As the EU recovers and lending mends, these will be great ways to ride the rally.
Another idea for stock pickers is to play Europe via multinationals with big exposure on the content — such as Detroit auto giant Ford (F), for example.
While Ford earnings have been fueled by sales of its F-Series trucks at home, it’s important to note that the stock has been rising despite the fact that Europe operations are still running in the red. But the good news is that Ford has been able to increase its market share in Europe through the downturn, so if and when a recovery takes root, that could mean significant profits for the automaker.
This is obviously a secondary play on Europe, because you’re buying a U.S. based stock that has many moving parts … but done right, this is a good way to hedge your bets while still having enough of a footprint in Europe to provide outperformance.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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