Europe, which has been long believed to be simply too volatile
for prudent long-term investors, appears to have turned the
The world experienced years of one crisis after another
sweeping the eurozone. These financial missteps destabilized
theequity markets, creating a dangerous place for investors.
Lastyear , EuropeanCentral Bank President Mario Draghi made the
unprecedented promise that hewill "do whatever it takes" to save
the commoncurrency . This single statement has led to greater
stability to the European Union's (
)economy and growth in thestock market .
Certainly, not all regions are thriving, but things are
improving enough to create a compelling case fordiversification
into the European stock markets.
The primary reason for this improvement is the
full-forcesupport of the EU Central Bank for the unified euro
currency. Fears of the euro being devalued or even eliminated
resulted in deep economic stability concerns due to lack of trust
in the currency. Now, these fears have lifted, bringing back the
confidence needed for stock market growth.
Signs of greater confidence in the EU economy include the
first signs of growth for the past sixquarters . In the second
quarter, the eurozone economy beat estimates by expanding 0.3%.
Clearly, this isn't much, but it's the first green sprouts after
the long economic winter.
As an investor, what I like best is the fact that eurostocks
trade at a 25% discount to long-term valuation. Overall, euro
stocks are at a 50% discount to thebook value of U.S. stocks. The
European economic crisis has created opportunities for savvy
The smartest way investors can profit from Europe's upward
economic momentum is through exchange-tradedfunds (ETFs ), which
provide targeted exposure combined with professionally managed
diversification within the particular niche. They make much more
sense than an investor attempting to purchase individual
companies within the region to capture profits.
My favoriteETF to ride Europe back to prosperity is the
Vanguard FTSE Europe ETF (
. As its name implies, this ETF is intended to mirror the
performance of the FTSE Developed EuropeIndex . Launched in 2005,
thefund represents companies in 15 EU countries and is well
capitalized with anasset foundation of just under $6 billion. It
also boasts substantialliquidity with about 2 millionshares
The fund holds 503 stocks, with slightly more than 19% of the
portfolio held in the top 10 holdings. No individual holding
exceeds 3%, with Nestle the largest individual holding at 2.9%.
Royal Dutch Shell and HSBC Holdings take the second- and
VGK's Top 10 Holdings
Financial services is the largest single sector with consumer
defensive and industrials filling the second- and third-biggest
VGK's Sector Weightings
There has recently been a significant increase incapital
flowing to this fund in the seven days prior to Aug. 20.
According to research firm ETF Channel, there was a $621 million
inflow, a week-over-week increase of just over 8%.
Over the past year, the fund has returned 12.5% with ayield a
little less than 5.5%.
A look at the technical picture shows VGK has been in a sharp
uptrend since June 24. The fund has climbed more than 12% to the
$53 area in the past two months. Technical support exists at $52,
creating a strong risk-to-reward ratio for a long-term entry.
Risks to Consider:
The eurozone is improving, but it still has a long way to go.
Southern regions such as Italy and Spain may continue to struggle
while theygain footing. I'm not suggesting that investors go
all-in on the pending EU recovery, as the risk remains high
despite the positive signs. However, it is time to start
diversifying into Europe to capture the substantialupside
Action to Take -->
Entering the VGK ETF at the current level in the $53 area with
stops just below support at $52 makes solid technical sense. My
six-month target for shares is $60.
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