Thursday, September 15, 2011

5 Less-Risky Ways to Buy Europe at a Discount

It seems no investor wants to touch Europe, the world's riskiest investment region.

Old Europe may boast a model for democracy (Switzerland), innovation (Italy) and economic might (Germany), but the cradle of Western civilization (Greece) is bringing down the entire euro area and infecting the rest of the world.

Still, anyone willing to take a chance on the continent can pick up plenty of European-themed exchange traded funds at deep discounts. Morningstar ETF analyst Timothy Strauts isn't big on European investments these days, but says investors could generate outsized returns if -- and "if" is the operative word -- "European governments can actually come together and stem the tide on the Greek crisis."

The analyst's reluctance to recommend European exchange traded funds stems from the fact that the Greek government's potential imminent default on its debt has put the euro's survival as Europe's unified currency in doubt.

"A breakup of the euro would have so many unintended consequences that any investment in Europe is highly risky right now, " Strauts says.

But if you're brave at heart, Strauts notes that you can pick up these four European ETFs on the cheap.

IShares MSCI Europe Financials Index ETF: This fund focuses exclusively on European financial companies, "so it's right in the center of the crisis -- and its recent performance has obviously been terrible," Strauts says.

Launched just 17 months ago to mirror the MSCI Europe Financials Index, the ETF is off 36% since July 1.

IShares S&P Europe 350 Index ETF: Strauts says this ETF is less risky than the Europe Financials Index fund because it's diversified into more than just the banking sector.

He added that British companies, which haven't suffered as much as those in continental Europe because the United Kingdom doesn't use the euro, make up the largest share of the Europe 350 Index fund's assets.

Still, French and German firms account for a quarter of the ETF's holdings -- a fact that has sent the fund tumbling. The ETF, which mirrors the large-cap S&P Europe 350 Index, has plunged 25% since July 1.

SPDR Barclays Capital International Treasury Bond ETF: This fund offers 50% exposure to European bonds, but debt from problem countries like Spain and Italy make up just 8% of holdings.

British and German bonds, whose prices have risen recently due to a "flight to quality," account for a far larger piece of the fund's European component. And non-European debt, particularly well-regarded Japanese Treasury bonds, make up half of the portfolio.

So, while this ETF has fallen 3% since Aug. 23, the fund is actually up 6.4% this year.

IShares MSCI United Kingdom Index ETF: This ETF offers a less-risky European play because it invests only in Britain.

"If you want to invest in Europe but want a little more protection, you'll like this ETF," Strauts said. "It'll definitely go down if the European crisis worsens, but shouldn't go down as much as the Europe 350 fund will."

True, the MSCI United Kingdom Index ETF has fallen 18% from its April peak. But the fund, which mirrors the broad MSCI United Kingdom Index, is up 3.5% from a 52-week low on Aug. 8.

Another option: Autoliv.

If you prefer individual stocks to ETFs, Morningstar equity analyst Michael Tian recommends Swedish car-parts maker Autoliv, whose shares have tumbled 37% on the New York Stock Exchange in a little over two months.

"The stock has pretty much fallen apart this year -- but if you believe Europe as a whole isn't going to fall apart, Autoliv is a quality business that you can invest in at a great price," Tian said.

The analyst said Autoliv trades for less than 10 times projected 2011 earnings even though the company has about 11% operating margins.

Morningstar rates the stock at four stars out of a possible five and estimates Autoliv's fair value at $80 a share -- way above its current $50.

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