Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some European stocks stocks to your portfolio but don't have the time or expertise to handpick a few, the Vanguard FTSE Europe ETF (NYSEMKT:VGK) could save you a lot of trouble. Instead of trying to figure out which European stocks will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual-fund cousins. This ETF, focused on European stocks, sports a very low expense ratio -- an annual fee -- of 0.12%. It yields about 3%, too.
This ETF has slightly outperformed the MSCI EAFE index over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why European stocks?
It's a smart idea to diversify your holdings not only by market size and industry, but also geographically. If the U.S. economy stalls or slides, other economies may still be performing well, so European and other international stocks could help offset losses in your portfolio. Dividend-paying companies offer an extra bonus, as dividends can significantly boost your returns. Internationally earned dividends can be a little more complicated than domestic ones, though.
More than a handful of European stocks had strong performances over the past year. Vodafone (NASDAQ:VOD), headquartered in the U.K., surged 55% and yields a whopping 5.5%. Vodafone is collecting some $130 billion from Verizon for its 45% stake in Verizon Wireless, which will be used to reward shareholders, beef up its wireless business, and help fund its growth abroad. Many are waiting to see whether AT&T buys Vodafone. Bears don't like Vodafone's shrinking free cash flow and its near-term reliance on Verizon's performance, but bulls see the stock as appealingly valued.
Switzerland-based pharmaceutical powerhouse Novartis (NYSE:NVS) jumped 37% and yields 3.2%. It suffered a patent expiration for its multibillion-dollar Diovan drug last year, but it has received a bunch of breakthrough therapy designations from the FDA, and its pipeline is promising. Novartis has a diverse array of drugs on the market, but some worry about new and competing drugs, some of which offer less scary side effects. The company's third quarter offered mixed results, including disappointing earnings but increased projections. Bulls like the positive results for Novartis' avian flu vaccine and hope that it can protect its Sandostatin franchise. There's talk that the company might split up some of its businesses, too.
France-based oil giant Total S.A. (NYSE:TOT) popped 30% and yields 4.5%. Total is already diversified and is expanding its reach more, boosting its liquefied natural gas (LNG) operations and investing in solar energy. Total has plans to drill in the arctic, but is also proceeding carefully there, sensing significant risk. Other risks for investors in Total include its debt and other obligations. On the other hand, Total sports an appealing valuation and is positioned to profit from recent offshore discoveries near Cyprus and from growth projects it has been investing in.
Other European stocks didn't do quite as well over the last year, but could see their fortunes change in the coming years. Diageo (NYSE:DEO) advanced a respectable 15% and yields 2.9%. The spirits specialist offers a lot to like, such as 40% of its revenue coming from emerging markets, which sport economies that can grow faster than ours. Diageo is boosting its position in China and isn't afraid to innovate, such as with its new flavors of Smirnoff vodka (Wild Honey or Cinna-Sugar Twist, anyone?). One Diageo drawback is its recent non-bargain-level valuation.
The big picture
If you're interested in adding some European stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies and make investing in it -- and profiting from it -- that much easier.