ETFs: More Trouble for Europe Markets?

Bob Pisani is off; this post was written by CNBC producer Robert Hum.

As noted earlier, weakness in overseas indices has translated to steep declines in international ETFs (see previous post).

Disconcerting to investors in European stocks, though, is how much of the 2009 gains have been lost during the past 6-7 months. Many of the broad-based Europe ETFs have now lost over half of the gains accrued from its March 2009 lows to October/November 2009 highs.

As an example, take the largest broad-based European ETF, Vanguard European . It nearly doubled in value from $26.76 in March 2009 to $52.67 in November. Since then, however, it has given up HALF of those gains. On the other hand, the S&P 500 has fared much better – it has only lost just over a QUARTER of its gains from March 2009 lows to April 2010 highs.

International ETFs: A Play on Equities and Currencies

Take another large broad-based European ETF, iShares MSCI EMU , which tracks stocks from countries in the European Monetary Union. The ETF is down 22 percent this year, but most European indices aren’t down nearly that much. Why the difference?

As’s Dave Nadig & Matt Hougan point out, U.S. investors in European ETFs have suffered a double whammy of sorts this year. They have been equally hurt by 1) poor performance from European equities AND 2) the plunge in the Euro.

How much have the losses been compounded by the weak euro? In the case of the EZU, which tracks the MSCI EMU Index, notes that on a euro basis (i.e., without taking into account impact of the euro’s declines), the index has only lost 10 percent on the year — dramatically less than 22 percent the index has lost on a dollar basis.

Essentially, European investors tracking the MSCI EMU Index aren’t experiencing as hefty losses as U.S. investors because they aren’t exposed to the currency’s fluctuations.

The bottom line: when investing in foreign ETFs, keep in mind that investment is a play on BOTH the underlying stocks or bonds, as well as the related currency.


For more on how ETFs can play a role in an investment portfolio, check out our newly-launched Model ETF Portfolios page (also linked right below the Trader Talk logo at the top of this page). There, three leading ETF experts show how an investment portfolio can be created based on different investment strategies using just ETFs. More information on holdings, returns, trades, and commentary for the six ETF portfolios are located on that page.

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