5 Signs of Life From European Markets

Europe’s situation remains a moving target for investors.

Even in bad stock market years, families may still want to contribute to 529 plans.

Even in bad stock market years, families may still want to contribute to 529 plans.

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[See How to Protect Your Portfolio With 'Real' Assets.]

Wild card. It's election year in the United States, but perhaps more importantly for portfolios, May elections loom in France, Greece, and Ireland. Change is in the air for at least part of Europe's leadership. The question is whether the winners will embrace further fiscal reform and central bank and IMF debt-fix cooperation, or create a new round of setbacks?

Investment idea. After considering risks, investors likely should maintain some exposure to European equities, which account for some 25 percent of the world's market capitalization. Morningstar's Patricia Oey points out the advantages of the "low cost" Vanguard MSCI Europe Index ETF (VGK). European equities are higher-yielding relative to their U.S. counterparts, and at this time, this ETF has an attractive yield of more than 4 percent. Longer-term, the fund has the mechanics that Morningstar likes, but short-term fundamental headwinds make itsuitable only for those willing to accept a healthy dose of risk.

Something else to keep in mind: Like most international-equity ETFs, VGK does not hedge its foreign-currency exposure. As such, its returns reflect both asset-price changes and swings in exchange rates between the U.S. dollar and European currencies. Looking forward, it is more likely that this foreign-currency exposure will be a drag on the performance of this ETF given the ongoing eurozone sovereign debt crisis, says Oey.