European Stock ETFs - dummies

By Russell Wild

Europe is a good place to hold ETFs because it boasts the oldest, most established stock markets in the world: the Netherlands, 1611; Germany, 1685; and the United Kingdom, 1698. Relative to the stocks of most other nations, European stocks, as a whole, are seemingly low-priced (going by their price-earnings [P/E] ratios, anyway).

Europe’s strengths include political stability (well, for the most part . . .), an educated workforce, and a confederation of national economies making for the world’s largest single market. Germany, the largest economy in Europe, has been growing its export industry faster than any nation on the planet.

Europe’s great weaknesses include a persistently high rate of unemployment (outside of Germany); a rapidly aging population; and a few member nations, most notably Greece and Portugal (and to a lesser extent Spain, Italy, and Ireland), whose governments have racked up some very serious debt. These nations are collectively — and none too flatteringly — known as the “PIGS” (Portugal, Ireland, Greece, Spain) or sometimes “PIIGS” (with Italy thrown in).

Even with its weaknesses on full display, the European market definitely deserves a piece of your portfolio.

Vanguard MSCI Europe ETF (VGK)

Indexed to: MSCI Europe Index, which tracks approximately 465 companies in 16 European nations

Expense ratio: 0.14 percent

Top five country holdings: United Kingdom, France, Germany, Switzerland, Spain

This ETF has everything going for it: low cost, good diversification, and tax efficiency. You can’t go wrong (unless the European stock market falters, which, of course, could happen).

The mix of many nations and currencies (Euro, British Pound, Swiss Franc, Swedish Krona) gives this fund an especially good balance and an especially good way to help protect your portfolio from any single-country (or currency) collapse. Like all Vanguard ETFs, VGK trades free of commission if held at Vanguard.

BLDRS Europe 100 ADR (ADRU)

Indexed to: The Bank of New York Mellon Europe 100 ADR Index, a market-weighted basket of 100 European market-based ADRs (American Depositary Receipts) representing the United Kingdom (about half the money pot) and major nations of the European continent, in addition to, for some unknown reason, Israel

Expense ratio: 0.30 percent

Top five country holdings: United Kingdom, Switzerland, France, Spain, Germany

Not as diverse as the Vanguard European ETF, but with 100 stocks, it’s plenty diverse enough. The yearly expense ratio is about midway between the Vanguard European offering and the iShares Europe offering. All told, the BLDRS Europe is a good choice, although it may not be the best. (That, as usual, would be Vanguard.)

iShares S&P Europe 350 (IEV)

Indexed to: Standard & Poor’s Europe 350 Index, a collection of 350 large cap companies in 16 European countries

Expense ratio: 0.60 percent

Top five country holdings: United Kingdom, France, Germany, Switzerland, Spain

Like iShares domestic offerings, their foreign ETFs good products. The diversification is excellent. The indexes make sense. The tax efficiency is top notch. The only drawback: they’re relatively expensive. At roughly 3.3 times the cost of the Vanguard European offering, IEV just isn’t anything to write home about.