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Three Forgotten Ways to Play Europe with ETFs

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The European woes are getting deeper with the unresolved euro zone crisis, sending the world economy to the doldrums. In fact, the EU saw a contraction of 0.2% in the second quarter, marking the second time in three quarters that the region has registered negative growth.

A number of major European economies in the southern Euro zone, such as Italy, Spain and Greece, could be in some serious trouble and could face a low growth environment due to budget cuts, tight fiscal policy, rising unemployment, wage cuts and high debt levels (read: Beyond the PIIGS, Three Troubled European ETFs to Watch).

At the same time, many European countries are showing remarkable performances or better, suggesting that there might still be some interesting choices for investors looking to dial up their exposure to beaten down securities in the region.

In this regard, smaller European economies have been overlooked by investors and could well be worth playing. These countries have ETF options available that can provide direct and diversified access to their economies. The funds also have a lower correlation with the broad markets and, thus, can outperform in a crumbling market.

Below, we have highlighted the three European ETFs of the euro zone, which have managed to deliver respectable returns so far in 2012 despite being overlooked by most investors (read: Three European ETFs That Have Held Their Ground).

While these noteworthy performances might not continue, especially if Europe remains sluggish, any one of them could still be a solid pick for investors looking for a different way to play this important region:

Belgium - iShares MSCI Belgium Investable Market Fund (EWK)

Though the Belgian economy has decent growth prospects and low inflation, high unemployment and fiscal deficit remain lingering issues. Public debt is approaching 100% of GDP and economic turmoil in Europe is affecting the country’s export, the major driver of Belgian economic growth. Further, the nation still has to fully emerge from the 2008 financial crisis that had severely affected three major banks.

However, as euro zone problems are expected to ease in 2013 leading to increase in the country’s exports with a modest revival in consumer spending, the Belgian economy is set for expansionary mode in the future. 

Investors seeking to invest in the country may find EWK an intriguing choice. The fund has produced impressive returns of more than 21% so far in the year and yields an excellent dividend of 5.63% (read: Three Excellent Dividend ETFs for Safety and Income). Such exceptional returns are much more than the expense ratio of 0.52%.

With a holding of 49 stocks, the product tracks the MSCI Belgium Investable Market Index, before fees and expenses. Large caps account for 56% of the portfolio while mid and small caps take the remaining portion of the basket.

The product has a heavy concentration in the top securities, especially in Anheuser-Busch Inbev (BUD - Free Report) , which makes up for more than 24% of total assets alone while the top 10 holdings account for more than 70% of the assets. This suggests that the top 10 holdings dominate the returns of EWK.

From a sector perspective, consumer staples take the top spot in the basket with a 34% share, followed by financials (24%) and materials (13%) (read: The Comprehensive Guide to Consumer Staples ETFs).

Launched in March 1996, the ETF has attracted assets of $25.5 million this year. The fund trades in good volume of more than 60,000 shares per day, suggesting minimal extra trading cost in the form of bid/ask spread.

Austria - iShares MSCI Austria Investable Market Index Fund (EWO)

Austria is one of the richest countries in the world from a per capita GDP perspective. While the current account balance is not favorable compared to the other euro zone neighbors, the nation does a great deal of trade with Germany, which is still arguably the strong performer in the euro zone (read: The Comprehensive Guide to German ETF Investing).

Additionally, low inflation, little public debt and low unemployment in the country are boosting its economic growth. However, the Austrian economy is largely governed by the financial institutions and banks that could hamper the future growth, especially with the intensifying euro zone problems.

To target the Austrian market, investors have only one fund – EWO - initiated in March 1996. The fund returned no less than 10.5% year-to-date with an attractive dividend yield of 3.37%. Such returns are more than the annual fees of 52 bps.

The product seeks to match the performance of the MSCI Austria Investable Market Index, holding 34 securities in the basket. Like the other funds in the European space, large caps dominate the holdings with a tilt toward the value securities. The product allocates a large part of its assets to financials (35%) while industrials, materials and energy make up the next three slots in the portfolio.  

Like EWK, the fund puts more focus on its top 10 holdings, as OMV, Erste Group Bank and Andrtiz combined make up for nearly 34% of the total assets. In addition, it is more volatile than its Belgium counterpart. With AUM of $54.1 million, the fund trades in good volume of about 78,000 shares per day, suggesting minimal extra trading cost or no cost in the form of bid/ask spread.

Ireland - iShares MSCI Ireland Capped Investable Market Index Fund (EIRL)

The Irish economy is showing improvement this year and is gradually recovering from the 2008 crisis thanks to the ongoing fiscal consolidation, reviving domestic demand and firming exports. As euro zone problems are expected to ease in 2013, exports will start to regain strength, considered the most important driver for growth.

However, the public debt of Ireland is still a major concern, currently standing at 108% of GDP, and is climbing up to 117% of GDP by the end of 2012. High unemployment rates and fiscal deficit are also adding to the negative economic sentiment.

For investors seeking to play Ireland, EIRL is pretty much the only choice. Among the PIIGS, Irish funds have managed to perform strongly so far in 2012. In fact, EIRL delivered excellent returns of about 17% year-to-date, easily outpacing the other four members of the dubious group (read: Five Top Performing Single Country ETFs of 2012 (So Far)). The fund also yields a good dividend of 1.71% annually.

The product was launched in May 2010 and has total assets of $8.4 million under its management. It tracks the MSCI Ireland Investable Market 25/50 Index, before fees and expenses.

The fund holds 21 securities in the basket, with greater allocation going to the top 10 firms. CRH Plc, Kerry Group and ELAN Corp hold the top three positions with a combined share of 43%. From a sector perspective, materials, consumer staples, and industrials take the top three spots in the basket, with 26%, 23% and 23%, respectively.

The product has a nice mix of various asset classes. While large caps account for 34%, mid and small caps hold 28% and 38% of the assets, respectively. The fund has a slight tilt toward the value securities (read: Small Cap Value ETF Investing 101). Like many other funds in the space, this Irish fund charges 52 bps in fees per year from the investor. In addition, the fund involves extra cost in the form of wide bid/ask spreads thanks to the paltry volume of trading on a daily basis.

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