ETFs North Of The EU Mess

June 01, 2012

Europe's debt crisis is nowhere near over, but that doesn't mean ETF investors should avoid the continent altogether. They just need to look north.

Forget, for now, Spain, Italy and Greece—the problem children of the vaunted European Union. All three countries have their warts, and investors know this. Bank solvency is a major concern, and funding rates for all three countries have skyrocketed.

Look at the chart below to take measure of how badly the debt crisis is affecting these countries.

Western Europe Since_Dec

All three funds have also outperformed the British market, and NORW, the Norway fund, was the only of the three to underperform EWG, the Germany fund.

Compare that to the iShares MSCI EMU Index Fund (NYSEArca: EZU), which measures the entire European economic union, and it's clear these debt-gorged countries are in investors' cross hairs.

Looking For Options

One way for investors looking at Western Europe to avoid this pain is by diluting their exposure to these countries through a total Europe fund like the aforementioned EZU. But even that plan would have lost you more than 7 percent since the start of December 2011.

Another choice is the darling of Europe, the German ETF, the iShares MSCI Germany Index Fund (NYSEArca: EWG), which is roughly flat since December. Germany's economic fundamentals are clearly better than those of its tainted cousins.

But even the most contrarian of investors has to assume Germany is going to be on the hook for much of the tab needed to rescue other EU members from the economic abyss.

As such, it may just be that going outside the currency union will provide protection from the woes of the so-called PIIGS—Portugal, Italy, Ireland, Greece and Spain.

The iShares MSCI United Kingdom Index Fund (NYSEArca: EWU), the fund tracking the British market does just that.

While EWU has outperformed EZU and those funds tracking Italy Spain and Greece, its near 3 percent decline since December leaves a lot to be desired. After all, in the words of Gordon Gekko: "That's a dog with different fleas."

Outside The Box

So if avoiding the euro isn't the answer, what is?

Luckily, Europe is a large continent and there are plenty of countries that offer interesting alternatives to the traditional western European "powerhouses."

Take a look at the chart below. Here we have the performance of three funds, plus EZU—the ETF focused on EU countries. The three alternative funds worth looking at are:

  • Global X FTSE Nordic Region ETF (NYSEArca: GXF)
  • Global X FTSE Norway ETF (NYSEArca: NORW)
  • iShares MSCI Netherlands Index Fund (NYSEArca: EWD)


Northern Europe Since December

All three funds have outperformed the EU-focused EZU, with GXF providing the best performance of the group.

All three funds have also outperformed the British market, and NORW, the Norway fund, only underperformed EWG, the Germany fund.

Moving forward, any further deterioration in the Italian, Greek or Spanish economies is likely to have a dampening effect on the eurozone. That's not even considering the potential impact of a Greek exit.

Germany may very well be the best-positioned European economy but, as I suggested, it's not immune from the ills that plague its brethren. Add this to the fact that any monetary solution to the crisis is going to require massive participation from the Germans, and the outlook for EWG dims further.

In the end, Europe is huge and its economy will influence global growth regardless of the problems facing regional economies.

And economies on its periphery: Norway, Sweden and the Nordic region generally offer investors alternative ways of getting exposure to Europe without playing Russian roulette with the region's debt problems.

Sure a global economic slowdown will impair the shipping industry, a big piece of the Scandinavian region's economy. But if you're concerned about that, than Europe may be nothing but a vacation destination for you.

What I'm saying is that GXF, NORW and EWD offer legitimate alternatives to more-popular European funds for investors who want exposure to the continent. In other words, don't throw the baby out with the bathwater.



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