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ETF Specialist

A Foreign Equity Fund With Low Exposure to European Banks

This fund trades near 10-year lows and has heavier weightings in firms with strong global operations.

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At our annual Morningstar Investment Conference last week, it was no surprise to see many fund managers weigh in with their thoughts on the euro crisis. Templeton's Michael Hasenstab is optimistic that policymakers will move in the right direction to form a stronger fiscal union, and University of Michigan economics professor Jim Adams believes that while some of the smaller countries may drop out of the euro, the euro will survive because it's better than the alternatives. As for European equities, three value managers, as well as GMO's Jeremy Grantham, all see long-term value in the region, especially in companies with strong global operations.

Investors who think Europe is attractively valued and are willing to ride out potential higher volatility in the near term may want to consider  iShares MSCI EAFE Growth Index (EFG). We like this fund not for its style orientation but for its sector exposure--its top weightings are consumer staples (21%), industrials (15%), and consumer discretionary (15%). Many of these companies, such as  Nestle (NSRGY),  GlaxoSmithKline (GSK), and  British American Tobacco (BTI) are strong global players with good exposure to the faster-growing emerging markets. Most cap-weighted passive Europe or international developed equity funds tend to have a heavy weighting in banks, which may see margins negatively affected by rising exposure to bad debts and more stringent regulations in the coming years. EFG has a relatively low 8% exposure to the financial sector. Finally, while this ETF is not a Europe pure play, its 40% exposure to developed Asian markets results in a portfolio that is less volatile relative to a Europe-only fund.

Patricia Oey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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