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In case you were holding out hope, the eurozone debt crisis isn't going away. As policymakers attempt to cobble together a solution, including austerity measures and new limits on spending for heavily indebted nations, investors are growing increasingly nervous. Bond yields on sovereign debt in eurozone countries such as Greece and Italy remain elevated, signaling heightened concerns over potential default. There's still a chance that a true crisis can be averted, but so far, eurozone officials don't seem to be acting with the sort of urgency the situation seems to require.
Global investors are right to be concerned about the unfolding crisis overseas. Initial signs are already indicating that the broader eurozone region is slipping into recession. And there's just no telling how well, or how poorly, the situation will be resolved. With such a cloud of uncertainty hanging over the European continent, it's not surprising that in recent months, investors have yanked a lot of money out of funds that invest in this region. And while the eurozone looks like it's headed for a year of stagnation at best, fleeing the continent completely could be a big mistake.
While investors may not want to overweight European stocks in their portfolio right now, there's no reason to cut back on exposure completely. Almost no one can time the market perfectly, so it's probably self-defeating at this point to try to avoid European stocks until the picture becomes clearer and then move back into the market when it looks like an all-clear signal has been given. Much of a potential doom-and-gloom scenario has probably already been priced into eurozone stocks, so it makes more sense to hold on to at least some exposure here. If you're looking for well-diversified global investments that step lightly in this troubled arena, here are two low-cost options that get the job done:
WisdomTree Global ex-US Growth ETF (NYSE: DNL )
Current allocation to developed Europe: 19%
The average foreign large-cap blend fund devotes more than 42% of its portfolio to stocks in developed European nations; this fund has less than half that exposure. This exchange-traded fund tracks the performance of a fundamentally weighted index that invests in both developed and emerging foreign markets. It consists of dividend-paying companies that pass WisdomTree's screens for market capitalization and liquidity, among other measures. Perhaps not surprisingly for a dividend-focused fund, energy and materials stocks are a big attraction here, together accounting for roughly half of total assets. Big-name players like Royal Dutch Shell (NYSE: RDS-A ) , Brazilian mining firm Vale (NYSE: VALE ) , and Australia's BHP Billiton (NYSE: BHP ) are among the fund's biggest bets.
This fund has only been around for a little over five years, but in that time it has managed to produce a solid track record, with an annualized 1.5% return since its June 2006 inception. That's in comparison to a 1.2% annualized loss for the MSCI World ex-U.S. Index and a 1.5% loss for the average large-cap foreign blend fund. The fund's focus on more financially healthy companies means that it tends to shine during challenging market environments, as it did in 2008 when it walloped the MSCI EAFE Index by more than 30 percentage points.
Its conservative nature also means it will likely lag in more speculative markets, as it did in 2009. But over the long run, the WisdomTree Global ex-US Growth ETF should provide reasonable returns while avoiding troubled corners of the global market.
Vanguard Total International Stock Index ETF (NYSE: VXUS )
Current allocation to developed Europe: 27%
This fund is designed to track the performance of the MSCI All-Country World ex-USA Investable Market Index. That's a mouthful, but what it means is that it invests in thousands of companies in both developed and emerging markets across the globe, serving as a proxy for the entire global stock market outside of the U.S. With a super-low 0.20% price tag, this fund is one of the cheapest ways to get total foreign stock coverage in one stop. The exchange-traded fund itself is less than a year old, but the index fund version has been around since 1996. Over the past 15-year period, the index fund has trumped nearly two-thirds of all funds in the large-cap foreign blend category.
The Vanguard Total International Stock Index ETF is market-cap-weighted, which means that investors will get a larger allocation to the biggest of big global names like Nestle, and the U.K.'s HSBC Holdings (NYSE: HBC ) and Vodafone Group (Nasdaq: VOD ) . But its emerging markets exposure ensures it will also benefit from the red-hot growth in these regions. Low annual turnover of 6% makes this fund a good choice for taxable investors as well. All in all, this fund is a reliable, all-weather option for foreign investors of any stripe, and especially so for those who desire limited exposure to the highly volatile eurozone area.
Time will tell whether the eurozone situation is resolved with minimal disruption to our global financial system or if it will perhaps usher in another worldwide recession -- or lead to some outcome in between. In the meantime, investors would do well to tread lightly here, but not abandon all hope.
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