Europe ETFs Struggle

Will McClatchy,
December 22, 2010

European ETFs were pummeled in 2010 by runs on Greek, Portuguese and Irish bonds. Now worries center on Spain and its overbuilt housing market. Bailouts so far have kept the European Union together, but taxpayers from wealthy nations such as Germany resist guaranteeing Eurozone fiscal stability.A sharp rise in the Swiss Franc along with a rise in German late in 2010 signaled that at least some investors have already headed for the door.The main concern for European equity ETFs is that government austerity measures will dampen already anemic growth. And such measures trigger disruptive strikes. In France especially strikes cripple national transport and bring many businesses to a standstill, further lowering government revenues.Still, Europe remains positioned to ride out economic turmoil better than the US in some regards. Its lower total debt-to-GDP and lower government budget deficits give it more room to fund stimulus programs and relax monetary policy. Some investors doubt European innovation, but GDP growth per capita is higher in Europe than the US where the economy is fueled more by immigration than productivity.Currency effects are a major consideration. The Euro benefits from tighter monetary policy and smaller deficits than the US. But the dollar is at fairly low exchange rates against the Euro. Most analysts are bearish on the Euro vs. the Dollar for 2011 and beyond.For European stocks themselves, money managers expect 2011 to be a little less volatile than nerve-wracking 2010: For basic broad coverage it is hard to beat Vanguard European Stock ETF (AMEX:VGK - News) with its annual fees of 0.12%. VGK holds over 500 stocks in major Western European markets. This includes European Union members and important independent countries like Switzerland and Norway. The UK is heavily represented but not Germany where many firms are privately held and domestically focused. Turnover for VGK is a modest 15%, and the median company size is about $15 Billion, firmly in large cap territory.An alternative is iShares S&P Europe 350 ETF (NYSEArca:IEV - News) with fairly rich annual fees of 0.60%. It follows a similar list of countries. IEV includes many mid- and small-cap firms. Returns suggest that IEV will track VGK closely over the long haul, before fees, hence our mild preference for the latter.SPDR S&P Emerging Europe ETF (GUR) covers mostly Eastern European countries and holds half its assets in politically volatile Russia.Targeting specific countries is also easily done with the iShares line of MSCI ETFs. Especially when equities approach historically low valuations, it is common practice to snap up beaten down countries. However, some of the weaker countries like Spain and Greece may show lower valuations for good reason. Among country ETFs to choose from are:

  • iShares MSCI Austria ETF (NYSEArca:EWO - News), annual fees: 0.59%
  • iShares MSCI Belgium ETF (NYSEArca:EWK - News), annual fees: 0.54%
  • iShares MSCI EMU ETF (NYSEArca:EZU - News), annual fees: 0.59%
  • iShares MSCI France ETF (NYSEArca:EWQ - News), annual fees: 0.54%
  • iShares MSCI Germany ETF (NYSEArca:EWG - News), annual fees: 0.54%
  • iShares MSCI Italy ETF (NYSEArca:EWI - News), annual fees: 0.54%
  • iShares MSCI Netherlands ETF (NYSEArca:EWN - News), annual fees: 0.54%
  • iShares MSCI Spain ETF (NYSEArca:EWP - News), annual fees: 0.54%
  • iShares MSCI Sweden ETF (NYSEArca:EWD - News), annual fees: 0.54%
  • iShares MSCI Switzerland ETF (NYSEArca:EWL - News), annual fees: 0.54%
  • iShares MSCI United Kingdom ETF (NYSEArca:EWU - News), annual fees: 0.54%

After several fundamental ETFs attempting to best major European indexes withdrew in 2009, only one remains:

  • PowerShares FTSE RAFI Europe ETF (NYSEArca:PEF - News), annual fees: 0.75%

European firms are known for their ample and stable dividends. There are three ETFs in this category:

  • WisdomTree Europe Dividend ETF (NYSEArca:DEB - News), annual fees: 0.48%
  • WisdomTree Europe High-Yield Equity ETF (NYSEArca:DEW - News), annual fees: 0.58%
  • WisdomTree Europe SmallCap Dividend ETF (NYSEArca:DFE - News), annual fees: 0.58%

Co-founder of, author of two books on investing, and founder of, Will has been writing on indexing issues for 8 years. He holds an MBA from the University of Texas at Austin.