Europe ETFs Don't Stress After Tests, But Should Investors?

The majority of European banks passed a round of "stress tests" aimed to measure their financial system's durability against economic disasters. But some wonder whether the results would ease the minds of Europe exchange traded fund (ETF) investors who are worried about the stability of the whole euro system.

Only seven of Europe's 91 largest banks needed more capital to withstand any declines in economic growth or deterioration in sovereign debt issued by Greece, Portugal and Spain, reports Jack Ewing for The New York Times. [Europe ETFs Surge as Economy Shows Life.]

Still, some economists point out that the tests excluded possible circumstances, such as the possibility of Greece or another eurozone country defaulting. European policy makers responded by stating that they would never allow a country to default. [10 Steps to An International ETF Portfolio.]

Bank regulators and Central Bankers assert that the tests were rigorous, and fears about Europe's finances were overblown.

Now that those tests are done, what next? Banks are continuing with tight lending standards for both homes and businesses. This could keep growth in these banks modest as long as tight standards remain in place, but the standards could also help reduce risk. Despite the higher standards, loans grew at the fastest pace in 20 years last month, reports Jana Randow for Bloomberg.

UBS AG (NYSE: UBS  ) , Societe Generale SA (NYSE: GLE  ) , and Deutsche Bank AG (NYSE: DB  ) experienced large gains as the banks posted better-than-expected profits and regulators softened rules on capital, writes Fabio Benedetti for Bloomberg.

Clearly, not everyone buys that all is well in the European economy, and there are some risks in the market that remain. If you're not comfortable with those risks, you have two options: there are international financial ETFs with lower exposure to European banks, and you can also utilize a trend following strategy if you choose to hold an ETF with greater exposure to help you manage your risk. [How to Follow Trends.]

For more information on Europe, visit our Europe category. You can find various degrees of European bank exposure in these ETFs; you can research country allocations in the ETF Resume to see how it all breaks down:

  • iShares MSCI Europe Financials Sector (NYSE: EUFN  )
  • iShares S&P Global Financial (NYSE: IXG  ) : Europe is 25%
  • SPDR S&P International Financial Sector ETF (NYSE: IPF  ) : Europe is 52.5%

Max Chen contributed to this article.

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