3 ETFs To Play The European Recovery

europeThe European Union (EU) lost its top credit rating from one of the major credit rating agencies – Standard & Poor’s – on Friday on falling creditworthiness, rising tension on budget negotiations and lack of unity among the 28 members. The agency lowered the long-term debt rating on the region by one notch to AA+.

The move came after the S&P downgraded the Netherlands to AA+ last month and lowered its outlook on six other member unions – France, Italy, Spain, Malta, Slovenia and Cyprus – last year.

The S&P warned that the financial profile of the EU is getting worse and the cohesion among the union members is reducing. This is especially true given the first spending cut in the history of the EU. For 2014, the EU budget is set at €135.5 billion ($181.5 billion), which is 7% lower than last year.

The reduced budget indicates that the bloc could fall short of financing over the coming years if some countries disagree on contributions to the budget. The U.K., which is leading the European recovery, has filed for a ‘referendum’ that would allow the country to exit the EU in 2017. If approved, it could weaken the relation with the EU and threaten the stability of the region.

Europe Outlook Still Bright

According to the latest survey, the economic confidence in the Euro zone climbed to 98.5 in November from 97.7 in October. This represents the highest level in more than two years and suggests that the bloc is gaining momentum again after a slowdown in the third quarter.

Additionally, the unemployment rate fell slightly to 12.1% in October from a record 12.2% in September while inflation rose to 0.9% in November from 0.7% in October. Investors should note that unemployment is still higher than last year’s rate of 11.7% and inflation is below the ECB’s 2% annual target.

Further, the recent cut in the benchmark interest rate to a record low 0.25% by the European Central Bank (ECB) to support economic growth in the Euro zone and low inflation reflects optimism and confidence (read: 3 Top Ranked Europe ETFs to Buy Now).

The European Commission expects the Euro zone economy to grow 1.1% next year after contracting 0.4% this year thanks to fiscal consolidation and structural reforms. This outlook appears solid given that the economy shrank 0.7% 2012.

ETFs in Focus

Given the S&P downgrade but also an improving outlook, the European ETFs are in focus once again. Investors should closely watch the movement of these funds on the downgrade news and tap any opportunity. Below, we have highlighted the three most popular funds that could see heavy volumes in the days ahead on the news:

Vanguard FTSE Europe ETF (NYSEARCA:VGK)

This is by far the most popular and liquid ETF in the European space, having amassed nearly $13.2 billion in AUM and trading in volumes of more than 3.5 million shares. The ETF tracks the FTSE Developed Europe Index and primarily focuses on large caps with 85% of assets while charging a fee of just 12 bps a year.

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