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ETF Specialist

Is There Value in European Equity ETFs?

Maybe not, as austerity measures, bank deleveraging, and potential political instability create a challenging operating environment in the near and medium term.

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European equities' low valuations may present an attractive long-term investment opportunity. If you're looking to access this market,  Vanguard MSCI Europe ETF (VGK) is a great way to gain exposure. However, we would tread lightly here. In the near term, we expect trading in European equities to be driven more by headlines regarding the debt crisis rather than by fundamentals. And over the longer term, there is plenty of uncertainty over Europe's ability to effectively contain the ongoing crisis.

To date, European leaders have mainly reacted to issues when they bubble to the surface and have yet to address the root causes of the crisis, which include a lack of fiscal integration and trade imbalances within the eurozone because of different degrees of competitiveness among the member countries. Recently implemented initiatives, such as fiscal austerity in the troubled peripheral countries as well as in the United Kingdom, will likely stunt, if not choke, growth for the next few years and exacerbate the precarious fiscal situation of these countries. And any growth-friendly monetary easing by the European Central Bank, or ECB, in the near term may be constrained as inflation trends higher than expectations.

Patricia Oey has a position in the following securities mentioned above: EWG, EWU. Find out about Morningstar’s editorial policies.

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