We've all heard the old adage "sell in May and go away"; however, this year has been a little different. With the markets rallying well over 30% since hitting a 10 year low in March, investors stayed in the market through May and June to participate in the recovery. Now, in late June, many are wondering whether the markets have room to expand any further going into July and August, or if some analysts are right in saying that the U.S. markets may be due for another correction. One strategy that may be rather profitable in either case is to broaden your investments horizons and take a look at the European markets.
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Across the Pond
The European markets have followed the U.S. markets in the spring rally, though the European rise has been less pronounced. The FTSE 100 index, which tracks the 100 most highly capitalized companies in the UK, is up nearly 20% since early March, and Germany's DAX is up more than 30% over the same period. Also the Eurotop 100, which measures the performance of the 100 most highly capitalized blue chip companies throughout Europe has rallied about 25% since March, while the Dow Jones Euro Stoxx 50 is up over 30% as well.
So, as we can see, the European markets have fared just as well as our domestic markets in recent months and some would argue that their fundamentals support their current standing much more than in the U.S. With fears of a possible market correction in the U.S. markets, and many economists pointing to impending inflationary troubles, now might be a good time to diversify your portfolio by including some exposure to the European markets.
The SPDR Euro Stoxx 50 ETF (NYSE:FEZ) has performed admirably over the past three months (up 15%) and offers an easy way to replicate the returns from the Euro Stoxx 50 index. The index is home to some familiar names for Americans, including Nokia (NYSE:NOK), Seimans AG (NYSE:SI) and Unilever (NYSE:UN). Shares have receded in the past couple days following the Fed failing to outline what further measures it will take to boost the money supply. This is a sticky situation as Bernanke is focused on curbing inflation going forward while trying to keep the economy moving in a positive direction. The Eurozone is watching with vested interest.
Another exchange traded fund (ETF) that mirrors the performance of the Eurozone is the SPDR Stoxx 50 ETF (NYSE: FEU), which tracks the movement of the Dow Jones Stoxx 50 index. The fund is trading up 18% over the past three months and offers a beta of 1.11 as compared to 1.36 for FEZ, which may be attractive for many investors looking to diversify and add a little more security to their portfolio.
The Bottom Line
Jumping into the European markets can be a risky move with investors and analysts around the globe so unsure of where the global economy is headed. However, if inflation rears its ugly head here at home, that could really be a driving force behind a prolonged rally in the European markets. Take my advice with a grain of salt, but spending the summer in Europe may be a great play if things fall the right way. (To learn more, check out our Investopedia Special Feature: Exchange Traded Funds.)