Breaking Down European ETFs

By Matthew McCall | November 10, 2011 AAA

The news of out the eurozone remains the number one driver of financial markets around the globe. Recently a deal with Greece helped push U.S. stocks off their worst levels in years. Then a new concern began to take over the headlines; Italy could be the next country to default. Now there are whispers that France is also in trouble, as evidenced by the French OATS (bonds) yields spiking, as investors show their concern.
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Europe
As a whole, the region remains in a constant flux of news regarding the sovereign debt of its nations, as well as the health of its banking system. When the region is viewed as a whole, via the iShares S&P Europe 350 Index ETF (NYSE:IEV), it looks bad, but not horrible. All things considered this year, the ETF is only down 6.8%. Granted, it is lagging U.S. stocks as measured by the S&P 500, which is up less than 1% in 2011.

IEV is most heavily invested in the UK (36%), followed by France (14%), Switzerland (13%) and Germany (12%). Even though the ETF does not have large exposure to Italy or Spain, it does have 18% of its allocation in the financial sector. The ETF currently pays a 3.2% dividend yield and charges a 0.6% expense ratio. (For related reading, see Using ETFs To Build A Cost-Effective Portfolio.)

Financials
Investing in the European financials has not been easy this year. The iShares MSCI European Financials ETF (NYSE:EUFN) is down 16.9% in 2011, falling well behind all major European indices. Similar to IEV, the ETF is heavily invested in the UK (32%), with Switzerland, Spain, Germany and France making up at least 11%, each.

When the news out of Europe is negative, EUFN will typically take a bigger loss than the overall region. On the flip side, when the news turned positive last month, the ETF rallied over 30% in a matter of one month, as investors turned back to the risk-on trade and began nibbling on the financials. The expense ratio for EUFN is 0.48% and the dividend yield is 3.1%.

Individual Countries
The first two European ETFs were heavily invested in the UK and thankfully, considering the iShares MSCI United Kingdom ETF (NYSE:EWU) is only down 1.2% in 2011, much better than its peers. The ETF is heavily invested in energy, financials and consumer staples. The current dividend is 3.1% and charges an expense ratio of 0.53%.

The country at the forefront of the issues gripping the world markets right now is Italy, and even after a big rally over the last month, the iShares MSCI Italy ETF (NYSE:EWI) remains down 15.7% for the year. The ETF will be at the burden of any debt issues the country faces, because of a large (29%) allocation to financials. The expense ratio is 0.54% and the dividend yield is 2.2%.

If France is the next country to be in the headlines it could add to the already 13% loss the iShares MSCI France ETF (NYSE:EWQ) has already endured in 2011. The one silver lining is that EWQ has half the exposure to financials as EWI does, and is more heavily allocated in the industrials and energy sectors. The expense ratio is 0.54% and the dividend is 4.4%.

The Bottom Line
If I was planning a trip to Europe I would choose France for the great wine and food, however, when it comes to investing my money, I will shy away from the French, at this time. If we look back a couple years, when Ireland was the country getting slammed, it took some time for it to regain its footing. In 2011 the iShares Ireland ETF (NYSE:EIRL) is only down 0.13% and outperforming its peers. So I would look to a country such Italy, in a couple months after the current storm passes, as a buying opportunity. (For related reading on ETFs, see 5 ETF Flaws You Shouldn't Overlook.)

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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

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