Investing in Europe: Benefits of European ETFs

A European ETF is appropriate to add diversity to an investment portfolio that may be top heavy with domestic securities. A European ETF seeks to mirror the return of its underlying European market index such as those tracking the London Stock Exchange, Tokyo Stock Exchange or even the Bombay or Mumbai Stock Exchange in India. European ETFs are a broad term that includes the Far East and emerging market exchanges as well such as Japan and India. An investor should always consider the broadest way to achieve investment diversification by including investment in foreign and foreign based securities.

Exchange Traded Funds or ETFs

An exchange traded fund, or ETF, is a fund that is based on the performance of an underlying security index. The aim of an ETF is to provide the investor with a performance return that mirrors that of the underlying index. ETFs are passively managed as oppose to the active management found with mutual funds. ETFs fall under the same regulatory rules as mutual funds, but are not mutual funds. ETFs do not look to outperform their index, although it is possible that this could happen. It is also possible to lose money when investing in an ETF, as is the case in any type of investing.

Portfolio Diversification with International Securities

One of the basic tenets of investing is to seek diversification within a portfolio. Diversification is accomplished not only by picking different types of securities within the same asset classes such as cash, bonds and stocks, but also to choose investment in different asset classes as well. A portfolio top heavy in blue chip companies such as IBM or Disney is not as diversified as the same portfolio that also invests in Sony Corporation and other international stocks. The same principle on diversification holds true when talking about ETFs.

Thinking Global

An investment consultant usually advises their clients to consider looking beyond our borders for additional investment opportunities. These opportunities usually include companies that are familiar to American investors, but based in another country. Broadening your view can mean great opportunity. For example, an investor may invest in Sweden’s InBev, before it made its acquisition of American brewer Anheiser-Bush or maybe invested in Richard Branson’s Virgin Atlantic and its various subsidiaries in media and transportation.

European ETFs can also provide a smoothing of return expectations and allow an investor to benefit from the increase exposure of other performing companies without necessarily incurring the direct risk of stocks. It is also important to pay attention to tax laws concerning European ETFs. You will want to discuss your profits/losses with your accountant to properly report the information on your return.