Total Europe? There’s No ETF for That.

For a continent with such magnificent heritage, Europe is a mess. The post-WW2 economic order is unraveling by the day. Look at what we’ve seen just in the last couple of weeks …

• Greece is once again on the verge of defaulting on its national debt.

• Italy had its already-tenuous credit outlook cut even lower by Standard & Poor’s.

• In Spain, the ruling Socialist party was pummeled in local elections. People are not pleased with the government’s austerity measures.

• Belgium’s credit outlook is now negative, according to ratings agency Fitch, as an electoral deadlock leaves the nation politically deadlocked.

• Ireland and Portugal need a bailout, but first the European Union has to raise the cash … which may not be so easy.

[Editor’s note: Weiss Sovereign Debt Ratings had already downgraded Belgium to a “C” and Spain to a “D+.”]

I don’t know how Europe will find a way out. Whatever happens, you can bet that many investors will try to take advantage with exchange traded funds (ETFs). So today I want to give you a few tips. As you’ll see, the European ETF map still has a few empty spots.

How Do You Define “Europe?”

Europe isn’t hard to locate on your desktop globe … but defining it with precision is surprisingly hard. Are Russia and Turkey European, Asian, or both? Is Iceland really part of Europe despite the long swim? If so, why is Morocco not European too? It’s just a quick hop across the Strait of Gibraltar.

You may hear about the “euro zone” where the euro currency is used. It sounds comprehensive. But what about the U.K., Switzerland, Sweden, and others? Many still cling to their own national currencies.

Europe is further split into “developed” and “emerging” economies. The latter consists mainly of the former Soviet satellite states but also includes other nations more to the West.

Europe in One Trade?
Not So Fast.

These are some of the reasons you still can’t buy a “total” Europe ETF. No single benchmark includes all the financial markets that most people think of as “Europe.” The building blocks exist if you want to piece together a portfolio. But you can’t get Europe in one trade.

To me this is astonishing. Innovative ETF sponsors offer tiny funds for all kinds of niche markets, but for some reason they haven’t created a truly comprehensive all-Europe ETF.

The same holds true for bonds. Now may not be a good time to jump into European fixed income. But it would be nice to have a way when the time comes.

Yet there is no European bond ETF. The best you can do is PowerShares DB German Bund Futures ETN (BUNL) and its leveraged cousin, PowerShares DB 3x German Bund Futures ETN (BUNT).

European Sector ETFs:
A Short List

I’m a big fan of investing by sector. I’ve found over the years that sector rotation creates some outstanding profit opportunities. It’s hard to take advantage of these trends with broad-based stock funds.

U.S. industry sectors are well-covered by ETFs. Europe? Not so much. Here is the complete list of Europe-focused sector funds:

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

That’s it — two sector ETFs, one of which is so cryptically named you may not know it invests in real estate, and both with volume so low it makes them dangerous to trade. This may be sufficient if your strategy consists of rotating between financials and real estate sector, but I prefer more versatility.

What’s the Hold-Up?

Perhaps I’m the only one who has noticed there isn’t a single ETF solution for Europe. However, I feel sure the people who invent new ETFs are aware of these gaps. They’ve simply chosen not to fill them. Why? I think there are two answers …

First is demand. Launching an ETF is expensive, so new ones usually come out when investors start clamoring for them. ETF sponsors keep close tabs on this and will respond when they think it is worth the effort.

The second answer is more difficult. The international crossword puzzle of tax laws, trade policies, and currency restrictions sometimes makes it impractical to offer certain investment alternatives, no matter how much people want them. Resolving these thorny issues can take years.

The good news? You can still invest in Europe — or at least parts of it — through around 50 ETFs and ETNs. Whether you should invest in Europe right now is a different question.

What we know for sure is that the Continent (however you define it) isn’t going anywhere. As always, the key is to move in and out of the right ETFs at the right time.

Best wishes,

Ron