ETF Talk: Europe’s Worrisome Debt

Greece’s fiscal woes have dominated the news in recent weeks but what you may not know is how to profit from the news. Although the European Union has promised to address the situation, Greece is not the only European country currently struggling with its debt load. The fiscally faltering countries to watch are Europe’s so-called PIIGS — Portugal, Ireland, Italy, Greece and Spain.

Investors worried about potential fiscal meltdowns in these countries may want to take a well-diversified, international position to avoid fallout from potential financial bloodletting among the PIIGS. One way to do so is by investing in iShares MSCI EAFE Index (EFA). This exchange-traded fund (ETF) seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the European, Australasian, and Far Eastern markets that are tracked by the MSCI EAFE Index. EFA currently is not one of my recommendations but it is a fund that offers limited exposure to the troubled PIIGS. The fund focuses on the developed markets that generally are protected from dire debt woes.

The biggest holdings in EFA, as of the end of January, were in Japan, 22.11%; the United Kingdom, 21.37%; France, 10.06%; Australia, 8.16%; Switzerland, 7.82%; and Germany, 7.66%. Two of the PIIGS, Spain, 4.3%, and Italy, 3.29%, follow. With only limited exposure to the PIIGS, the fund offers a chance to benefit from international exposure without taking excessive risk.

Key sectors held by the fund at the end of January were financials, 25.09%; industrials, 11.58%; consumer staples, 10.28%; materials, 9.86%; consumer discretionary, 9.82%; and health care, 8.42%. That degree of sector diversification helps insulate the fund from an overdependence on the performance of a given industry.

The stocks that composed the biggest shares of the portfolio’s positions, at the end of January, were HSBC Holdings PLC, 1.91%; BP PLC, 1.8%; Nestle SA-REG, 1.7%; Total SA, 1.26%; Roche Holding AG-Genusschein, 1.22%; and BHP Billiton Ltd., 1.2%. Clearly, an individual company does not account for an inordinate part of the fund’s performance. The lack of concentration in any particular position should reassure investors who do not want the fund to be dependent on one geographic region, industry or specific company.

If you think the market’s rebound during the past few days is the start of a trend, EFA offers a way to tap future gains. Its diversification also limits the fund’s risk. With market conditions remaining volatile, protecting your assets should be one of your top considerations.

Do you want advice about which ETFs to buy and to sell? If so, please sign up for my ETF Trader service by clicking here. As always, I am pleased to answer your questions about ETFs, so do not hesitate to email me if you have one. To send an ETF question to me, simply click here. You may see your question answered in a future ETF Talk.