I am often asked about investing opportunities in Europe. With the European debt crisis dominating the headlines over the last two years, savvy investors have been looking for value investment opportunities. Who can blame us after seeing the rebound in our own markets, especially the S&P 500's (SPY), off of the lows reached as a result of our own banking sector meltdown. Although I'm sure there are value plays in Europe, when you look at the returns of broad-basket European equity investments you are not exactly seeing the same carnage as you did with U.S. equities during our own crisis.
The S&P 500 has once again established itself as the premier benchmark, with a trailing 12 month total return of 29.05% as of the close on August 20th. This leadership has shown that the U.S. markets still command the world's attention. The strong performance in the S&P 500, I believe, has led to very acceptable returns in European equities during this time of uncertainty. Consider how awful our markets responded to our own debt crisis. In 2008, the S&P 500 posted a total return loss of 37%. Looking back at the trailing twelve month period ending 6/30/2009 and after our markets recovery began, the S&P was still posting a negative return of 26.51%. Investors are looking for these same types of "baby being thrown out with the bathwater" opportunities in European stocks. The S&P's rising tide may not lift all boats, but in the case of European stocks it has kept them afloat.
As European equity investors have been looking for a firm solution to the EU's problems, they have not exactly had their net worth wiped out by their own crisis. Consider these trailing one year, two year and three year total returns for these popular European ETFs:
BLDRS Europe 100 ADR Index (ADRU)
iShares S&P Europe 350 Index (IEV)
Vanguard MSCI Europe ETF (VGK)
WisdomTree Europe SmallCap Div (DFE)
SPDR STOXX Europe 50 (FEU)
We all know the problem countries within the European Union, but these returns tell us two things. 1) A broader approach to investing in Europe has paid off, and 2) The U.S. markets, especially the returns of the S&P 500, still have a tremendous amount of impact on investor psychology in Europe. As much as people enjoyed piling on the S&P 500's lackluster performance during the "Lost Decade", the fact is Europe has usually followed. Our banking/credit crisis was Europe's crisis as well. From 2008 to the end of the first quarter of 2009 the S&P 500 lost 43.94% of its value. Compare that to the return of the above European ETFs for the same period of time.
BLDRS Europe 100 ADR Index
iShares S&P Europe 350 Index
Vanguard MSCI Europe ETF
WisdomTree Europe SmallCap Div
SPDR STOXX Europe 50
I believe if an acceptable deal is reached to address the European debt issues, then you will see these ETFs begin to provide more robust returns. Returns that will have them following their leader. That leader is the U.S. markets and the S&P 500, and that is how it has been for European stocks for quite some time. Always remember that while the S&P 500 struggled during the "Lost Decade" (2000-2009), the average European stock mutual fund only posted average annual gains of 2.6% for the same period of time. In short, when we sneeze, Europe gets sick too.