The late great Milton Friedman once said that most of the energy of political work is devoted to correcting the errors of previous political work. Nowhere is this more apparent than the Euro. Imagine all the human capital that went into creating the single currency, and now all the human capital devoted to both saving and unwinding it. As another great economist, Bastiat, pointed out, the tragedy is often not the results we do see, but the results we don't see. We'll never know what these brilliant minds working on this problem could have come up with if they had been free to pursue more fruitful endeavors.
There is an opportunity amongst this waste, but it is not in guessing the outcome of the Euro. The opportunity is in the tangible businesses in Europe, which can be accessed via the ETF FEZ.
The FEZ tracks the Dow Jones EURO STOXX 50 Index, a free float, market capitalization weighted index of many of the largest companies across Europe. It has an expense ratio of 0.29%, was launched in October of 2002, and has a dividend yield of 4.44%. Not surprisingly, it is highly correlated to the EURUSD with a long term correlation of 0.83.
It is trading at the bottom of its range, and over 50% off the high of 66. Encouragingly, volume is beginning to pick up as the FEZ rallies from the bottom of the range.
The most crucial aspect of the FEZ is the underlying companies and their prospects going forward. Although Europe is a quagmire, whatever the outcome it is highly improbable the people of Europe will stop depositing money in banks, using oil, drinking beer or go without the other luxuries of modern life. It is also highly improbable that the rest of the world, especially the masses who for the first time are realizing the benefits of capitalism, are going to go without these goods.
The companies in the FEZ supply the aforementioned goods and services:
Although the heavier weighting in financial services may cause concern, I see it as a benefit. Financial service companies are trading at historically low valuations worldwide, and a diversified holding of them will allow an investor to profit once the financial sector recovers.
Country wise, 70% of the ETF holds companies in France and Germany, with the largest portion of the remainder in Spain and Italy.
The largest companies in the ETF:
FEZ Top Ten Holdings
Total SA (TOT): 6.26%
Sanofi (SNY): 5.48%
Siemens AG (SI): 4.65%
Basf SE (BASFY.PK): 4.20%
Sap AG (SAP): 3.48%
Bayer AG (BAYZF.PK): 3.43%
Eni SpA (EIPAF.PK): 3.35%
Anheuser-Busch Inbev SA (BUD): 3.30%
Unilever NV DR (UL): 3.20%
Banco Santander (SAN): 3.16%
% Assets In Top 10: 40.51%
Total Holdings: 55
Looking deeper into the top 10 companies in the ETF, the earnings cover the dividends and they are all profitable companies.
Although there are no doubt risks in buying into the Eurozone, in the case of the FEZ, the benefits outweigh the risks. The price action has established a clear floor, which the FEZ is trading close to, and the underlying companies are profitable and generate enough earnings to cover their dividend, even in this harsh environment. Keep in mind, these are hardly "European" companies, as they derive a significant portion of their revenues from overseas.
Whether the Euro survives or not, the majority of the companies in this ETF will continue to generate cash for their shareholders. With the dividend protected via earnings and specific company risk diminished with diversification, the retail investor can earn an above average yield while the Eurozone crisis drags on, looking forward to capital appreciation once the crisis is resolved regardless of the outcome of the currency.