Greece Bond Market Crash, Europe and ETFs

By: Ron_Rowland

When Americans hear about Greece, the first thought that comes to mind is usually “ancient history.” Now Greece is all over the headlines for its financial woes.

But if truth be told, Greece hasn’t done anything different from many other countries, including the U.S.! The government simply spent too much money, the citizens enjoyed too many overly-generous social programs, and eventually the bill came due. Now someone has to pay up — and the Greeks don’t have the cash.

The complication is that Greece is part of the euro currency union. This means other member countries can’t just let Greece default on its debts. Therefore a grand negotiation is now underway to figure out how they’ll share the pain.

Greece’s economy is crumbling before our eyes.

A further complication is that several other European nations, such as Portugal, Ireland, Italy and Spain, are teetering on the edge of disaster too.  

So today I want to draw your attention to some exchange traded funds (ETFs) that focus on Europe. You can think about it as a list of ETFs to avoid for now — or a shopping list to consider buying whenever Greece and the rest of Europe finally touch bottom.

Buying Europe in an ETF …

Numerous ETFs will give you a broad-based allocation to European stock markets. The two most popular are:

• Vanguard European ETF (VGK)
• iShares S&P Europe 350 (IEV)

Both these funds include 15+ different countries, but they aren’t equally weighted. The United Kingdom, France, Germany and Switzerland are the biggest European markets and together they account for the bulk of the holdings. And there is little or no direct exposure to Greek stocks.

ETFs have erased many of Europe’s borders for investors.

Another group of Europe ETFs includes multiple countries in various smaller combinations …

iShares MSCI EMU (EZU) is interesting because it includes only those nations that use the euro as official currency. That means EZU is heavy on France and Germany and omits the U.K. and Switzerland. Greece weighs in at just 1.2 percent of this ETF.

Since the worst of the economic problems are in Southern Europe, you might have better luck traveling north on the map to look at the Scandinavian countries. Global X FTSE Nordic 30 (GXF) does this for you, with exposure to Sweden, Denmark, Norway, and Finland.

iShares MSCI Emerging Markets Eastern Europe (ESR) and SPDR S&P Emerging Europe (GUR) specialize in the smaller, less developed European markets. In most cases these are the former communist countries that remain closely tied to Russia, such as Hungary and Poland — and, of course, Russia itself.

Buying Europe — One Country at a Time

Another way to invest in Europe is with single-country funds. This can be useful because it lets you customize a portfolio with just the allocation you think will work. Here are some ETFs you might want to consider:

• iShares MSCI Austria (EWO)
• iShares MSCI France (EWQ)
• iShares MSCI Germany (EWG)
• iShares MSCI Italy (EWI)
• iShares MSCI Netherlands (EWN)
• iShares MSCI Spain (EWP)
• iShares MSCI Sweden (EWD)
• iShares MSCI Switzerland (EWL)
• iShares MSCI United Kingdom (EWU)
• Market Vectors Poland (PLND)
• Market Vectors Russia (RSX)
• SPDR S&P Russia (RBL)

A couple of sector-based, European ETFs might be worth a look, too:

• iShares MSCI Europe Financials Sector (EUFN)
• iShares FTSE EPRA/NAREIT Europe (IFEU)

IFEU is a real estate fund, by the way, a fact which is not at all apparent in the unwieldy name.

Inverse Europe …

Finally, ProShares UltraShort MSCI Europe (EPV) is a 2X daily leverage inverse fund. That means it’s designed to move twice (200 percent) the inverse (opposite) of the daily performance of the MSCI Europe Index before fees and expenses.

In other words, if for example the index drops 10 percent, the ETF’s shares could rise 20 percent.

Try to trade when the U.S. and European markets are open.

Given how crazy the situation is right now in Europe, you might be tempted to jump right into EPV. Be careful if you do: It’s best used as a short-term trading vehicle. EPV can be a big winner if your timing is just right, or it can hand you big losses if you are even a little bit early or late.

BONUS: Trading Tip

If you buy or sell any kind of Europe-focused ETF, it’s usually a good idea to enter your order in the morning hours, U.S. time. That’s because most European markets are still open and there is typically more liquidity. You’ll see the savings in the form of a tighter bid/ask spread and quicker fills.

Best wishes,

Ron

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