European ETFs: Soccer Finalists In Focus

The Union of European Football Association wrapped up the Euro 2008 tournament at the end of June and crowned Spain as the new champion. Spain won out over Germany in a hard fought 1-0 match. Investors who may base their international diversification decisions on countries with supreme football (soccer for U.S. readers) talent may succeed with a long term time horizon.

In this article we'll look at the holdings of several Europe-focused exchange-traded funds, taking our cue from the outcome of the Euro 2008 tournament. (For a closer look at this investment vehicle, read An Inside Look At ETF Construction.)

The Match Winner - Spain
The iShares MSCI Spain Index (AMEX:EWP) is down 18% since the beginning of the year. Its top-three holdings are Spanish banking concern, Banco Santander (NYSE:STD), telecommunications provider Telefonica SA (NYSE:TEF) and Argentinean bank, Banco Bilbao Vizcaya Argentaria (NYSE:BBV). Over the past three years EWP is up approximately 59%.

The Match Runner Up - Germany
The iShares MSCI Germany Index (AMEX:EWG) is down nearly 15% since the beginning of the year while its benchmark, the MSCI Emerging Markets Index EAFE (Europe, Asia, and Far East) was down 8% through July 3. EWG's top three holdings are power and gas company E.ON, electrical engineering company Siemens (NYSE:SI), and the large insurer and financial services company Allianz SE (NYSE:AZ). Another familiar name among the ETF's top-five holdings is Mercedes Benz manufacturer Daimler. Over the past three years EWG is up approximately 66%.

The Semi-finalists - Russia & Turkey
Russia and Turkey missed their shot at the football crown, but investors are not locked out of investing in either. The Market Vectors Russia ETF (AMEX:RSX) is down 8% year to date. The iShares MSCI Turkey Invest Market Index (AMEX:TUR) which has been open for less than one year is down 21% since its inception in April. The Russian focused ETF has benefited from the export of oil during the present commodities boom and has moved up approximately 35% from its inception in May of 2007.

Threats of Inflation
The slowdown in the U.S. economy has received much attention, but currency strategists are focusing on the threat of inflation around the globe. On July 3, 2008, the European Central Bank raised its benchmark lending rate a quarter point to 4.25% with the hope of keeping inflation in check in the Eurozone. Oil has continued to set new records reaching $145 per barrel just before the July 4th weekend. Countries around the world are citing rising energy prices as a major contributor to consumer price inflation.

Stoppage Time
European football fans may have a certain comfort level with the countries that host their favorite teams. Ultimately investors will still have to pay attention to the interplay of the global economy before choosing an investment solely on the strength of football dominance. If sorting through country specific ETFs will not make it onto investors' agendas, they can find diversification in the iShares MSCI EAFE Index (AMEX:EFA). Investing overseas involves additional risk and volatility that must be tied to a long term strategy of diversification and scheduled rebalancing.

For further reading on using ETFs, check out 3 Steps To A Profitable ETF Portfolio and Finding Fortune In Foreign-Stock ETFs.