Does it Make Sense to Invest In Europe?

04/20/2011 Share 0 comments

Increasing deficits are the focus everywhere these days – especially in Europe. Large deficits across the globe raise doubt about sovereign debt and what actions are required to reduce these debts. Austerity measures like increased taxation, public sector job losses, freezing of pension payments, less investment in welfare have been implemented in Greece, Ireland, Portugal and Spain in 2011.

 The European Central Bank (ECB) has taken bold steps to assist distressed regions of Europe and the Irish consolidation program is another example. The European Central Bank will accept all debt instruments backed by the Irish government as collateral against ECB loans as the country attempts to shore up its banking industry this alone is set to account for around 9% of GDP in the period leading up to 2014. This is not a one-off case as the ECB has supported euro-area members state before to help them in these kinds of situations.

 The last year’s returns from European equities were disappointing from 7% to 13% (Approx). This compares to Emerging Markets from 14.5% to 20% (Approx.) and USA equities from 14.5% to 30% (Approx.).

 This table shows the top Europe Equities ETFs.

VGK shows the highest return of 12.7% annually and shows progressive figures of 2.57% for five years yield. The 5 year benchmark interest rates make this investment attractive. The daily average volume also shows good numbers above 1 million. The expense ratio of the fund is 0.14% as of 02-25-2011.

EZU returns are not as good in relation to VGK. The EZU has an annual return of 7.11% with an average daily volume of 471 k. the 3 year returns are in negative territory and the five year returns are also below the benchmark interest rate. IEV is not a good performer the one year returns are only 8.6% the 3 year returns are negative as is the case for all the major European ETF’s.

VGK Seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of Europe. Holds stocks of companies located in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. The fund total net assets are of $8.2 billion as of 02/28/2011 in 482 stocks. Please find below the list of 10 largest holding socks in VGK net assets value of which are 19.7%

 1                     Royal Dutch Shell PLC

 2                     Nestle SA

 3                     HSBC Holdings PLC

 4                     BP PLC

 5                     Vodafone Group PLC

 6                     Total SA

 7                     Novartis AG

 8                     Siemens AG

 9                     Roche Holding AG

 10                   Telephonica  SA

Diversifying the portfolio is essential and to have foreign equity in the portfolio provides a hedge against any drop in equity values in a specific country. Europe has significant challenges to overcome but it is important to have access to European market. In the short term, it may be better to consider broader exposure to established international markets with ETFs such as (EFA) or (VEA). Despite that, while returns are not currently great, VGK is the only ETF which shows good sign of progression in this harsh time.

Symbols: VGK, IEV, EZU

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.