European stocks and exchange traded funds (ETFs) have benefited from rising investor appetite for risk. Even though there are positive indicators for looking into investing into Europe, an investor should be aware that possible risks still abound.

Analysts are out making the case for Europe to be the next comeback story. Why?

With some countries on the continent posting growth, Europe and its related ETF could be on the way to a recovery.

Germany and France both reported increases in growth and the numbers have convinced some analysts that Europe’s economy is recovering, perhaps even faster than that of the United States’, reports Charlie Parker for Citywire.

Over the past several months, concerns over the fallout from the massive stimulus plans, rising unemployment, and continued weakness in corporate earnings have left many investors rethinking their allocations to U.S. equities.

Once considered an essential element of any portfolio, American stocks have fallen out of favor with some investors who have shifted assets towards emerging markets and other regions (the number of ex-U.S. ETFs available is a testament to this trend). For investors disillusioned with prospects for American markets but unwilling to take on the risk inherent in emerging and frontier market funds, Europe may present an appealing option.

The EU Economic Sentiment Indicators (ESI), covering both the EU 27 and the eurozone respectively, declined again in March, though the pace of decline was slower than in the first two months of the year. The indicator fell by 0.6 points in the EU, and by 0.7 points in the euro area, to 60.3 and 64.6 respectively. As a result the indicators for both regions now stand at their lowest levels since the current series was launched in January 1985.

The ongoing global economic upheaval has shaken European markets, along with the region’s ETFs and they may have to wait for signs of stability elsewhere before Europe can see some semblance of normalcy.

Europe didn’t really have problems in subprime mortgages, but nonetheless, the effects of the United States’ problems were far-reaching. The economies of Europe are seen as tightly linked to those of the rest of the world, writes Jack Ewing for Spiegel Online International.

By Marc Lichtenfeld

If the global economy were a hospital patient, you’d definitely find it in the Intensive Care Unit. It’s not on life support just yet, but it certainly finds itself in an increasingly precarious position, due to the numerous negative factors swirling around the financial world.

The number of ETFs on Deathwatch continues to grow as we enter 2009. My current list contains 139 names: 97 ETFs and 42 ETNs. The list includes any ETF/ETN that is at least six months old and had an Average Daily Value Traded of less than $100,000 in December.

Exchange Trade Notes are suffering from concerns of default risk. The Lehman Brothers (LEHMQ.PK) bankruptcy, which resulted in the demise of three ETNs, is causing investors to hesitate before throwing money into these products. Unless ETN sponsors to take steps to calm investor fears, their representation on the list is likely to grow in the coming months.

Recently, I published an ETF performance map on a year to date basis. Numbers were hovering around -50% for European ETFs and -60% for Asian ETFs, except Japan. I think it will be interesting to see which markets benefit from last week's rally the most.

Look at the above picture - it is a 12 month performance map for European Exchange Traded funds, and it's no surprise that it is a deep red color.

Eastern Europe, ETFs Feel the U.S. Credit Crunch

The economic troubles that weighed down ETFs started here in the U.S. before spreading to Europe. Now, after a strong run, Eastern Europe could be next up to experience a slowdown.

Eastern Europe has been experiencing a bubble all its own, with new private businesses popping up everywhere, and economic and political stability. But the party cannot last forever, and wage costs are creeping up, labor shortages are hurting, and infrastructure keeps on aging, which is actually stopping up Poland’s trade, says The Economist.

Short selling has been a major topic on Wall Street lately, with the focus mainly on the short interest of individual stocks.  Below we highlight the US ETFs with the highest short interest as a percentage of shares outstanding as well as the ones with the highest short interest ratios. 

The most heavily shorted ETFs have short interest numbers that well exceed their shares outstanding.  The S&P Retail ETF (XRT) has a short interest figure that is more than 6 times its shares outstanding.  This seems a bit out of whack to us. 

By Paul Amery

Deutsche Bank's launch of its own ETFs under the db x-trackers brand was one of the major events in the European market last year. Index Universe met recently with Manooj Mistry of Deutsche Bank to get an update of the firm's activities and plans.

Disappointing earnings reports sent European stocks tumbling last week, ending a brief early-spring rally and leaving PowerShares FTSE RAFI Europe ETF (PEF) down about 9% for the year through April 14. The fund’s losses were almost identical to the S&P 500’s fall for the period but compared favorably with the nearly 15% slide of the pan-European Dow Jones STOXX 600 Index.

PEF ranked 25th on the PowerShares Momentum Tracker Table last week thanks to a 19-spot gain from February 27, making it the table’s top-ranking international fund. The fund’s mediocre performance last week could drag on that momentum. That said, the struggles of the U.S. economy could smooth the way for PEF to ascend to the table’s upper reaches.

The euro area has shown surprising resilience in the face of the gales sweeping through financial markets, writes Elga Bartsch in Morgan Stanley's latest Global Economic Forum. However, on the back of upward pressures on the money market and credit spreads, Morgan Stanley lowered its GDP growth forecasts for the euro area to just 1.5% for both this year and next (see Morgan Stanley's Euroland Economics: From Soft Rebalancing to Conflict of Interest, March 19, 2008). This is below market consensus, below the ECB’s staff projections and below the official forecasting community.

Bartsch elaborates:

As new fundamentally-weighted ETFs come to market and those already listed continue to grow in assets, the debate about the merits of fundamental indexing rages on. Don’t worry; this isn’t about rehashing the arguments for or against.

Instead, let’s suppose you’re sold on the concept, or at least convinced enough that you want to create a global investment portfolio using these new funds. Luckily, PowerShares now offers six fundamentally-weighted funds that allow you to cover most of the world:

The dual launches showcase the fact that PowerShares sees the international space as its next big avenue of growth. But the launches also show what a complicated task PowerShares faces as it markets its increasingly huge array of products, as the two product families have significant overlaps.

FTSE RAFI
The FTSE RAFI indexes follow what they call a “fundamental indexing” strategy. In practice, that means that they weight components based on four quantitative factors: book value, earnings, sales and dividends. FTSE RAFI maintains that this strategy will outperform traditional cap-weighted indexes by not overweighting overvalued stocks and underweighting undervalued stocks.
The new fund covers four of the five big categories in international investing, and are the:

All-World, and All-World Ex-US
iShares MSCI ACWI (All Country World Index) Index Fund ETF (ACWI)
SPDR MSCI ACWI ex-US ETF (CWI)
SPDR S&P International Small Cap ETF (GWX)
The SPDR S&P World ex-US ETF (GWL)
Vanguard All-World Ex-US ETF (VEU)
NETS FTSE CNBC Global 300 Index Fund (MYG)

ETF provider PowerShares says it will launch Monday "the first wave" of PowerShares FTSE RAFI International Portfolios, which make use of fundamental weighting instead of the more traditional cap-weighting. Fundamental weighting means that component companies are weighted not by a single measure (such as market-cap or earnings), but rather by the size of four fundamentals measures: sales, cash flow, book value and dividends. The company says that fundamental weighting "avoids many of the risks associated with market-cap or single-measure weighted indexes, while simultaneously providing the opportunity for higher returns and lower risks when compared with cap-weighted benchmarks." The four indexes anticipated to launch Monday are: PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio, PowerShares FTSE RAFI Asia Pacific ex-Japan Portfolio, PowerShares FTSE RAFI Europe Portfolio and PowerShares FTSE RAFI Japan Portfolio.

Multi-Region Developed Market ETFs
BLDRS Developed Markets 100 ADR Index Fund (ADRD)
Claymore/Robeco Developed International Equity ETF (EEN)
Claymore/Robeco Developed World Equity ETF (EEW)
iShares S&P Global 100 Index Fund (IOO)
iShares MSCI EAFE Index Fund (EFA)
iShares FTSE Developed Small Cap ex-North America Index Fund (IFSM)
PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio (PXF)
PowerShares FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio (PDN)
RevenueShares ADR Fund ETF (RTR)
Vanguard Europe Pacific ETF (VEA)

The Marketwire press release explains that PowerShares partnered with Research Affiliates and FTSE to offer exposure to global markets using the Research Affiliates Fundamental Index strategy. These international funds seek to provide the exposure and the outperformance of traditional market-cap weighted indexes with fundamental weighting.The new ETFs will be: