Trading Nation

The unusual way to bet on US stocks without buying US stocks

Should your portfolio focus on Europe?

Those who are bullish on U.S. stocks might be better off buying ETFs that track European equities than those that track American indexes, based on recent market history.

Over the past five years, the correlation between the and the FTSE developed Europe all-cap index (as tracked by the Vanguard ETF VGK) has been very high. The weekly moves have had a correlation of 0.87, which is very close to the 1 that would indicate perfect synchronicity. Meanwhile, European stocks have been a bit more volatile than the S&P.

Correlation and relative volatilities are frequently assessed jointly with a measure known as "beta." In this case, the beta of the VGK to the S&P 500 is about 1.2. That means if the S&P 500 rises (or falls) 10 percent in a given week, the VGK can be expected to rise (or fall) 12 percent.

If one expects this relationship to hold, and is bullish on U.S. stocks, the VGK consequently looks to be a better bet than an S&P-tracking ETF like SPDR's SPY.

However, Erin Gibbs of S&P Investment Advisory points out that the beta of the VGK has slipped recently, as the volatility of European stocks has diminished.

"I would not use a five-year beta as a predictor of returns over the next three months," she wrote to CNBC on Tuesday. "Depending on the time range and frequency, the beta move all over the place, with the more recent beta in the past three years frequently below 1."

"I'd look instead at the bigger economic and fundamental drivers we might expect this summer between the regions," she continued. And given her expectation that the dollar will rise as higher rates make U.S. assets more attractive, and that earnings growth will look much better in America than in Europe, she said. "I'd stick with the U.S."

For Max Wolff of Manhattan Venture Partners, the strength of the recent relationship between American and European equities has a lot to do with the outsize influence of the Federal Reserve on stock prices.

In the short term, he prefers European equities as he predicts the European Central Bank will be more active than the Fed in combating the economic slowdown he foresees. In the longer term, he agrees that American stocks are the better pick, Wolff explained Tuesday on CNBC's "Trading Nation."

Over the past five years, U.S. stocks have clearly been the way to go. The SPY is up nearly 60 percent in that time, while the VGK is down about 6 percent.