The reason for the negativity stems from concerns over conflict in
Ukraine and reported euro zone growth at 0.3 percent in the fourth
quarter. Although inflation isn't a problem for now, almost no
analyst is forecasting robust acceleration for the year in the
region, which is expected to expand about 1 percent in 2014.
Beneath this lackluster scenario, though, lie several layers of
companies that are part of Europe's turnaround story. If you focus
on smaller-cap companies and those paying dividends, the picture is
a mite brighter.
Here are two options you might consider:
The FirstTrust Europe AlphaDEX exchange-traded fund, invests in an
equal-weighted portfolio of European stocks, some of which aren't
the name-brand companies found in most capitalization-weighted
The AlphaDEX holdings include roughly 1-percent positions in
companies like Bank of Piraeus S.A., Faurecia S.A. and Valeo S.A..
Year-to-date, the fund has gained 7 percent, compared to 1 percent
for the MSCI EAFE Index, a benchmark of international stocks,
through February 28.
By avoiding concentration in many of the mega-caps dominating most
European portfolios, the AlphaDEX has sampled several smaller
companies poised for growth, especially those in weaker but
recovering euro zone economies such as Greece, Ireland and Spain.
The fund charges 0.80 percent annually for management expenses,
which is nearly twice the average for similar funds. It's a pricey
fund, but worth the expense if the returns continue.
For a more focused approach on small-company stocks, consider the
WisdomTree Europe SmallCap Dividend Fund. This combines a preference
for dividend-paying stocks with a selection of companies in the
bottom 25 percent of market capitalization of the WisdomTree Europe
Dividend Index. The fund managed to capture the dramatic rebound in
stocks from Ireland, Portugal and Italy.
The WisdomTree fund holds stocks such as Logitech International SA,
Drillisch AG and Unipol Gruppo Finanziario SpA. The fund has
returned 8 percent in the year to date through Feb 28. It charges
0.58 percent for annual expenses.
CAST A WIDER NET
Keep in mind that a small-company play in Europe is no substitute
for a wider approach that would encompass a broad-based recovery
throughout Europe. But widespread prosperity is slow in coming to
the continent and may need more of a jumpstart.
According to the recently issued "Macro Investment Strategy" from
BMO Private Bank in Chicago, developed international markets such as
the euro zone need some sort of catalyst to move higher.
[to top of second column]
BMO expects that to come in the form of euro zone policymakers
stimulating their economies this year, "resulting in equity gains on
the back of Euro weakness."
So far this year, the outlook is bright: All the leading euro zone
nations broke out of a recession last year.
Last month, the Markit Flash Eurozone Composite Purchasing Manager's
Index, a gauge of economic activity, was at its highest point since
May 2011. That's a hopeful sign that manufacturing and job creation
will pick up in a low-inflation, low-interest rate environment. Euro
zone manufacturing rose last month in all four of Europe's biggest
economies for the first time in three years.
Want to cast a wider net among the big-name euro zone stocks? The
iShares Trust S&P Euro holds companies like Nestle SA, Novartis AG
and Roche Holding AG. The fund is up 2 percent this year through Feb
28. It charges 0.60 percent in annual management charges.
Another worthy big-basket European fund is the Vanguard FTSE Europe
ETF, which is a much-less expensive way of holding the biggest
European companies. The Vanguard fund holds many of the same
companies in the iShares portfolio, but tracks a different index and
only charges 0.12 percent annually in management expenses. It's also
up 2 percent year to date.
Yet modest gains may not materialize in the euro zone if other
global players such as the U.S. and China slow down. That fear was a
major thorn in the side of mega-cap U.S. stock returns earlier this
year as measured by the S&P 500 index, which is up about 1 percent
this year through February 28 after a 32-percent return last year.
Thinking long-term, the broader the strategy, the more you will have
exposure to the largest global companies based in Europe and the
continuing recovery, which is still a work in progress.
(Editing by Beth Pinsker)
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