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After being stressed for a couple of years by sovereign debt issues, high unemployment and stagnant growth, the European economy is now on the verge of recovery. The economy consisting of 27 countries is improving slowly and is expected to grow 1.4% in 2014, according to the European Commission.
 
The Euro zone (comprising 17 countries) economy finally emerged from its six-quarter long recession with a 0.3% growth recorded for the second quarter of 2013.(read: Avoid These 3 Eurozone ETFs This Summer). This is especially true given some surprising key growth indicators. Let us have a look at the indicators in detail below:
 
Increasing Business Activity
 
Markit’s PMI index for the Euro zone rose to 50.5 in July, well above 48.7 last month and above the neutral 50.0 mark (signals expansion) for the first time since January 2012. Manufacturing production rose at the fastest pace since June 2011, as the sector registered output growth for the first time in 17 months.
The brighter outlook comes from stabilizing domestic markets with improvements in the manufacturing and service sectors. Business activity in Europe’s largest economy, Germany, rebounded in July and would aid the entire Euro zone. (read: Time to Get on the German ETF Bandwagon?).
 
Rising Consumer Confidence
 
Consumer confidence in the region rose to the highest level in almost two years to -17.4 in July. The number is well above the -18.8 in June and market expectation of -18.30. Among the five largest economies, Italy has enjoyed the highest consumer confidence while the Netherlands experienced weakening sentiments.
 
Strengthening Euro
 
Meanwhile, the euro has also shown some strength against the dollar in the past weeks. In fact, the second-most traded currency in the world has been able to hold above the 1.30 mark against the dollar. This means that the euro is still up more than 2% against the greenback when looking at the past one-month period, suggesting that overall worries have been declining in Europe (read: Bet on the Euro with These 3 ETFs).
 
Stabilizing Unemployment
 
Unemployment across the Euro zone remained stable at 12.1% in June but jobless claim fell for the first time in more than two years, signaling some optimism in the region. In fact, Greece and Spain still have a higher unemployment rate of 26.9% and 26.3%, respectively, followed by Portugal at 17.4% and Cyprus at 17.3%. However, many other regions such as Austria, Germany, the Netherlands, Finland and Belgium have unemployment rates under 10%, indicating a good sign.
 
Falling Interest Rates
 
Meanwhile, interest rates in some of the troubled economies have fallen to a large extent. For example, interest rates in Greece have fallen drastically from 25.82% a year ago to just 10.53% currently. Similarly, Spain and Italy currently have rates of 4.67% and 4.42%, respectively.
 
ECB Measures Bearing Fruit
 
In order to avoid falling into a deeper recession, the European Central Bank (ECB) in May had cut its benchmark interest rate by a quarter percentage point to a record low of 0.50%. Additionally, it is providing ample liquidity to the Euro zone banks when needed to support the recession hit economy.
 
UK Leading Growth
 
The U.K. is leading the way in European recovery with GDP growth of 0.6% in the second quarter, in line with the market expectation and up from 0.3% in the first quarter. The expansion was broad based with agriculture, services, production and construction all turning to growth. This represents the first expansion in three years.
 
How to Play?
 
Based on these improving fundamentals along with the central bank's dovish comments, European stocks and the related ETFs are seeing huge fund inflows of late and are expected to get a boost in the coming months.
 
Further, the European equities look cheaper at current levels compared to the U.S. and Japanese counterparts and reflect a good entry point for investors (read: 3 European ETFs Holding Their Ground).
 
For investors interested in the current recovery, we have highlighted four funds, which offer targeted bets on the economy, a strategy that can help investors profit if confidence in the bloc continues to rise.
 
Vanguard FTSE Europe ETF (VGK)
 
This fund provides exposure to 17 European countries by tracking the FTSE Developed Europe Index. This is by far the most popular and liquid ETF in the European space, having amassed over $7.4 billion in AUM and trading in volumes of more than 2.25 million shares.
 
The ETF primarily focuses on large caps with 84% of assets and charges a fee of just 12 bps a year. The product is well spread out across a large basket of 504 stocks as each security makes up for less than 2.9% share.
 
In terms of sector exposure, financials take one-fifth of the assets while consumer non-cyclical and healthcare together make up for 27% share. The Britain firms dominate the portfolio with 33.8% share, closely followed by double-digit allocations of 14.6% in France, 14.4% in Switzerland and 13.5% in Germany.
 
VGK added over 5% in the past one month and currently has a Zacks ETF Rank of 3 or ‘Hold’ rating.
 
SPDR EURO STOXX 50 ETF (FEZ)
 
This fund follows EURO STOXX 50 Index, which measures the performance of some of the largest companies across the components of the 20 EURO STOXX Supersector Indexes. The fund appears rich with AUM of over $2.8 billion, and average daily volume of nearly 1 million shares. The ETF charges 29 bps in fees per year from investors.
 
Holding 55 securities in its basket, the product puts less than 39% of its assets in the top 10 holdings. The ETF is skewed towards financials, as it takes roughly one-fourth of the total assets, while industrials, healthcare and consumer staples round to the next three spots.
 
In terms of country allocations, France and Germany are leading with 38.12% and 31.07% share, respectively, followed by Spain (11.89%), Italy (7.51%), the Netherlands (7.38%), Belgium (3.24%) and Ireland (0.72%) (read: Is the France ETF in Trouble?).
 
The fund returned over 7.5% in the trailing one month and has a Zacks ETF Rank of 3 or ‘Hold’ rating.
 
iShares MSCI EMU Index Fund (EZU)
 
This ETF provides exposure to the EMU member countries (those European Union members that use the Euro as its currency) by tracking the MSCI EMU index. It is also one of the popular funds in the space with AUM of nearly $3 billion while charging investors 0.50% in annual fees.
 
The fund holds about 245 securities in its basket which is pretty spread across each security, as no single firm holds more than 3.53% of the assets. From a sector look, the product has a diverse approach with financials, industrials, consumer discretionary and consumer staples taking a double-digit allocation (read: 3 Top Ranked Financial ETFs to Buy Now).
 
Country weights for the top three are France (31.69%), Germany (29.47%) and the Netherlands (10.54%). EZU is a large cap centric fund and is extremely liquid, trading in volumes of 2.3 million shares per day.
 
The fund is up 7.6% over the last month and retains a Zacks ETF Rank of 3 or ‘Hold’ rating.
 
iShares Europe ETF (IEV)
 
This fund provides broad exposure to European markets and is less liquid relative to many other products in the space. It tracks the S&P EUROPE 350 index and holds 354 securities in its basket. The ETF has accumulated $1.5 million in total assets and charges 60 bps in fees per year.
 
The product is well diversified across individuals as none of the securities make up more than 2.83% of total assets. Here again, financials is the top sector with 21.18%, followed by consumer staples (14.13%), healthcare (12.90%) and industrials (10.98%).
 
In terms of country exposure, the product allocates 32.97% to the U.K. while Switzerland, France and Germany make up for at least 13% share in the basket each (see more in the Zacks ETF Center).
 
The fund gained over 5% in the trailing past month and has a Zacks ETF Rank of 3 or ‘Hold’ rating.


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