Europe: More Is Needed

EWQLast weekend, the Group of Eight got together and one of the key takeaways from their confab was that Greece wants to remain in the Euro Zone. Recent polls out of Greece indicate that conservative candidates are making headway and that could lead to the formation of a coalition government. In turn, that could send Greece down the road to austerity and save its status as a member of 17-nation common currency.

 

Those headlines explain why many European markets and ETFs traded higher on Monday. One such fund was the SPDR EURO STOXX 50 (NYSE: FEZ). Unfortunately, a fair portion of Europe’s gains evaporated on Tuesday as traders got back to doing what they’ve been doing so much of lately: Fretting over the fate of the Euro Zone and pondering the depth and magnitude of the region’s recession.

 

All of that merely reiterates what so many investors already know: Playing European stocks, even the blue chips, from the long side these days is akin to trying to catch falling knifes. That’s certainly the case with the SPDR EURO STOXX 50. This was a $34 ETF as recently as mid-March. On Tuesday, FEZ closed below $28, its year-to-date gains long since gone following a violation of support at $29.50 earlier this month.

 

In a more sanguine market environment, FEZ would be an excellent ETF to consider for Europe exposure, even for conservative investors. The fund’s top-10 holdings include oil blue chips such as Total (NYSE: TOT) and Eni (NYSE: E), pharmaceuticals giants Sanofi (NYSE: SNY) and Bayer and staples goliath Unilever (NYSE: UN). Said differently, FEZ’s 55 holdings include a lot of the companies one would want in a portfolio of European equities and the ETF’s 0.29% is reasonable to say the least.

 

But we’re not living in a sanguine environment. Investors are now coping with a market setting that punishes risk. So while it’s nice that the staples, telecommunications and utilities sectors figure prominently in FEZ, it cannot be ignored that financials and energy names combine for about a third of the fund’s weight. Those two sectors are to be avoided like the plague until they prove otherwise.

 

FEZ currently yields 5.6% and that’s nearly triple what one would get with the SPDR S&P 500 (NYSE: SPY), but given the aforementioned factors, FEZ’s high yield is by no means accidental and the ETF could prove to be more yield trap than value play.

 

Bottom line: While FEZ features a nice expense ratio, a compelling yield and a roster of familiar European corporate titans, the combined 55% allocation to France, Spain and Italy is just too much to look past at this point, indicating investors should pass on FEZ for the time being.

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