European ETFs offer simplicity and diversification without many of the fees associated with mutual funds. By purchasing single securities, international investors gain exposure to hundreds of different companies located throughout Europe, including exposure to specific countries or industries. However, like all investments, European ETFs offer both benefits and risks.
Benefits of European ETFs
Even though Europe is considered one of the safest economic regions in the world, the economic crisis in 2009 illustrated it still carries great risk. And, while Eastern Europe may have growth potential, very few international investors would buy into Western Europe for its growth prospects. Despite these concerns, investing in European ETFs provide a key role in any portfolio.
Familiarity
Europe houses some of the most recognizable companies in the world, which makes investing in those companies a lot more comfortable for many U.S. investors.
Diversification
Europe is a very economically diverse region, which makes European ETFs ideal for diversifying a primarily U.S.-based stock portfolio without the risk of emerging markets.
Low Risk
Aside from its rare times of crisis, Europe is generally considered to be a low-risk region relative to emerging markets in Latin America or Asia.
European Investing Risks
As with all investments, risk management is crucial when investing in international assets, like European ETFs. One of the primary concerns is currency risk. The currencies on the foreign exchange market fluctuate constantly. Currency risk is the exposure to this ever-changing monetary landscape, creating either unexpected profits or losses. Beyond currency risk, there are other risks involved in European investments.
Contagion
The European Union’s structure makes its members highly dependent on each other, which creates the possibility of contagion when a crisis arises.
Slow Growth
Many countries in Western Europe face the prospects of slower growth, which makes them less attractive for risk-seeking investors.
Most Popular
European ETFs can be divided into many different categories, including broad market ETFs, regional ETFs, and country-specific ETFs. There are also many other options, such as ETFs based on asset classes, such as the WisdomTree Europe SmallCap Dividend Fund (DFE).
Top 3 Broad European ETFs
Vanguard FTSE Europe ETF (VGK) iShares Europe ETF (IEV) SPDR Euro STOXX 50 ETF (FEZ)
Top 3 Regional European ETFs
iShares MSCI United Kingdom ETF (EWU) iShares MSCI Eurozone ETF (EZU) First Trust STOXX European Select Dividend Index Fund (FDD)
Top 3 Country-Specific European ETFs
iShares MSCI Germany ETF (EWG) iShares MSCI Switzerland ETF (EWL) iShares MSCI France ETF (EWQ)
ADRs as an Alternative
European ETFs may offer the easiest way to gain exposure to European markets, but they aren’t the only way to buy into the region. International investors can either purchase American Depository Receipts (ADRs) or buy stocks directly through foreign stock brokers. However, there are several things that investors should consider before taking these routes. Buying and selling stock on foreign stock exchanges can involve some tricky tax calculations and legal considerations. Researching individual foreign stocks can also prove difficult with foreign languages to translate and foreign currencies to convert. And while ADRs solve some of these problems, they are usually only available for very large foreign companies and tend to be somewhat liquid at times.
