With Spain's and Greece's recent debt downgrade aside, the rest of Europe is beginning to look like a good investment for 2010. Driven by the strength of exporter Germany (NYSE: EWG), the 16-nation Euro zone economy expanded by 0.4% in the third quarter after nearly five quarters of contraction. Germany, which grew by 0.7%, was helped by increased industrial production and consumer spending. Including all 27 members of the full European Union, Gross Domestic Product (GDP) grew in the Q3 by nearly 0.2%. (Thinking about investing in international fixed-income securities? Check out An Introduction To Emerging Market Bonds.)

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The Case For Investment
With the recent Dubai debacle still fresh in investors' minds, many portfolio strategists are taking a hard look at risk once again and have begun to pare down emerging market exposure. Europe comes to mind as an alternative to U.S. equities and has a number of catalysts propelling it forward.
Overall, the U.S. is in much worse shape versus the Euro zone on a number of metrics. While both run massive government debts, Europe's deficits are not as high when compared to GDP. Europe is a net exporter, and its consumers aren't struggling as much as the average American worker due to Europe's heavier savings rate.

On a stock metric basis, Europe is cheaper still. The average price-to-earnings ratio (P/E) for the broad S&P 500 (NYSE: SPY), based on operating earnings for the previous 12 months, is 28. European stocks trade at just 17 times. This is still below the historical average P/E of the low 20s. Euro stocks also trade nearly 15% below their historic long-term price-to-book ratio (P/B). Dividend yields overseas are larger too, as Europe seems to have more of a "dividend" culture with more companies returning earnings to shareholders. The S&P 500 yields 2.0%, while Europe yields 2.7%.

Adding Europe To A Portfolio
While some areas of the continent are still struggling - Spain (NYSE: EWP), with its massive 19% unemployment and construction bust, comes to mind - overall the European continent can offer investors portfolio growth as well as dollar diversification. Several exchange-traded funds (ETFs) dabble in Europe.

Vanguard's European Stock ETF (NYSE: VGK) offers the broadest way to add European companies to a portfolio. Holding nearly 480 large-, mid- and small-cap stocks and sporting a rock-bottom 0.18% expense ratio, VGK is an inexpensive diversified choice. Investors wanting to own just the 16-member nations of the Euro zone can turn to the iShares MSCI EMU Index (NYSE: EZU). The ETF follows 273 companies located in those nations, with France (30.72%) and Germany (24.25%) leading in the geographical weightings.

For investors who want to make a concentrated bet on Europe, the SPDR Dow Jones EURO STOXX 50 (NYSE: FEZ) follows 50 of the largest companies trading there, including the French oil giant Total SA (NYSE: TOT). Investors can make even more concentrated bets up or down on individual countries, as iShares has a whole suite of funds devoted to that purpose. Candidates include Austria (NYSE: EWO), Italy (NYSE: EWI) and Sweden (NYSE: EWD).

Bottom Line
Investors who still want international exposure, but don't want all the risks of emerging markets, may want to take a look at Europe. The Euro zone seems to be waking up from its recession earlier than the U.S., and many key stock metrics point in its favor for 2010. By using ETFs, investors can make bets as broad or as concentrated as they like. (To learn more about investing with ETFs, read Active Vs. Passive ETF Investing.)

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