3 Reasons Why Europe ETFs Deserve A Look [Vanguard FTSE Europe ETF, iShares MSCI Germany Index Fund (ETF), iShares S&P Europe 350 Index (ETF)]

europeAs we enter into the fifth consecutive year of a bull market, my colleague Russ Koesterich encourages investors to maintain their emphasis on stocks. But with volatility in emerging markets and a sense that U.S. equities are no longer cheap, investors are increasingly seeking exposure elsewhere. Enter: Europe.

I first hinted at Europe’s comeback on the Blog last fall, highlighting how pan-European equities gained momentum as a result of improving investor confidence in the battered Eurozone. U.S. flows into pan-European equity ETFs totaled $5.3 billion YTD*, while single country funds took in $1.4 billion. The United Kingdom and Spain led the charge with $0.7 billion and $0.4 billion, respectively. As the region gains momentum and stages an economic recovery, there are several reasons to revisit exposure in Europe.

Eurozone** stock valuations are attractive relative to U.S. stocks. As previously mentioned, we think Eurozone equities are inexpensive right now. If you look at the price to book ratio of the Eurozone versus the U.S. compared to the long term average, you can see there is much value to be had overseas.

Eurozone vs. U.S. Stocks

Price-To-Book Ratios

Source: Bloomberg as of 12/31/2013

Economies within the Eurozone are improving. We’re seeing significant developments in the Eurozone’s economy. It grew by 0.3% in the final three months of 2013, up from 0.1% growth in the previous quarter. Additionally, the CESIfo Business Climate Index, which measures the economic strength of Germany, reports that manufacturing improved for the fourth consecutive month in February.

Monetary policy promotes growth. As the Federal Reserve scales back its easy money program here in the U.S., the European Central Bank (ECB) is holding its key interest rate steady at 0.25% as the recovery strengthens. The market generally expects the ECB to keep its rates low for longer, as deflation remains a concern in the area.

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