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As the European crisis continues to shake the common currency area to its very foundations, investors have been scrambling to reallocate portfolios in order to prepare for any future disasters. Yet, the final emergency that pushes the continent over the edge never seems to come, leaving the EMU teetering on the brink of collapse.  Thanks to this never-ending situation that continues to dominate headlines, investors remain uncertain of how to position portfolios with European exposure heading into the new year. Yet, for those looking for a concentrated play on the continent, many might want to focus in on the most scrutinized sector of all, financials.

Financials have been severely beaten down over the course of 2011 as fears over a sovereign default caused many investors to sell off their holdings in a variety of euro zone-based banks. These institutions had, and continue to possess, immense exposure to government bonds from a variety of highly indebted nations suggesting that steep losses could be right around the corner for any bank that has heavy amounts of leverage. Despite this albatross, many banks in the region have seemingly stabilized or even gained in recent weeks, leading some to assume that there could be a turnaround heading into 2011. For these investors, a relatively obscure product in the ETF industry could be the ticket to play this important space, either from a long or short perspective (see HDGE: The Active Bear ETF Under The Microscope).

The product in question is the iShares MSCI Europe Financials Sector Index Fund (EUFN - ETF report). This ETF seeks to track the price and yield performance, before fees and expenses, of the MSCI Europe Financials Index. This benchmark looks to give investors broad exposure across the European financial sector both over country borders and the various segments of the financial space.

Currently, the fund puts close to half of its assets in the banking sector, although insurance (26%) and diversified financials (18.8%) also make up sizable chunks of assets. In terms of individual holdings, banks dominate with British firms coming in two of the top three spots as HSBC leads and is followed by Spanish firm Banco Santander and then UK-based Standard Chartered (SCBFF). In total, British firms comprise close to one-third of total assets trailed by double digit allocations to the following four nations; Germany, Switzerland, Spain, and France (see Hungarian Crisis Crushes Austria ETF).

Given how terrible the prospects have been across Europe in the financial sector, many investors shouldn’t be surprised to hear that the fund has put up a lackluster performance so far in 2011, losing close to 31% since the start of the year. Thanks in part to this, the fund has also failed to attract a meaningful amount of assets, as EUFN has less than $20 million under management. This has produced a suboptimal trading volume as only 26,000 shares change hands on a daily basis, giving the fund a relatively wide bid ask spread (read Forget UNG: Try These Natural Gas ETFs Instead).

Despite all these negatives, however, there are a few good things about the fund too. The product does pay out a nice dividend of close to 3.4% in 30 Day SEC Yield terms, a level that is far higher than many U.S.-based financial ETFs. Additionally, investors should note that the product has a PE ratio of just over 10 and a price-to-book ratio of just 1.2, suggesting that if the banks can survive the crisis, deep value could be unlocked. This could especially be true of the fund’s nearly 50% allocation to non-euro zone banks which could, on average, offer less exposure to the common currency than their EMU-based cousins (read BDCL: Yield King Of Leveraged ETFs).

Nevertheless, the product remains an extremely risky one that most long-term investors should probably avoid, as the European situation is far from resolved. With that being said, investors who have an enormous appetite for risk and believe that the euro zone can get its act together and prevent a sovereign default could see huge gains out of this fund in 2012. Either way, EUFN remains an often overlooked play on the fortunes of the euro zone that could be an excellent portfolio addition—either long or short—for anyone with a strong view about the future of the EU.

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