ETFs For Europe's Next Move

Cyprus, a tiny island nation with a population that is roughly 30 percent smaller than San Diego's, is reminding investors that all is not well in the eurozone.

Over the weekend, Cyprus' parliament delayed a vote on a bank deposit levy that would tax deposits of less than EUR100,000 at a rate of 6.75 percent and deposits north of EUR100,000 at 9.9 percent in an effort to shore up the country's ailing banks.

The delayed vote has sparked fears Cyprus could go bankrupt and face departure from the eurozone. To be sure, Cyprus is not Italy or Spain in terms of economic heft in the eurozone. Cyprus is not even on par with Greece in terms of economic importance in the region, but a country's size rarely matters when it comes to the eurozone roiling global financial markets.

Clearly, there are issues for investors considering long Europe positions to evaluate before jumping in as S&P Capital IQ points out in a new research note.

"According to Rob Quinn, S&P Capital IQ's Chief European Investment Strategist, the key drivers of equity valuations in recent years have been excess liquidity, inflation expectations and the discount rate," said the research firm. "However, Quinn believes global equity valuations have already experienced their quota of re-rating, with the P/E multiples at a multi-year high, and this may reverse into a headwind over the coming five quarters. Any further sustainable appreciation from here on in will require an earnings rebuild, in our view, and thus far in 2013, earnings estimates have been coming down."

Citing recent economic data out of the Eurozone, including some discouraging purchasing managers index reports, S&P Capital has unfavorable views on a pair of marquee Europe ETFs. The research firm sees negative implications for the Vanguard MSCI Europe ETF (NYSE:VGK) and the iShares MSCI EMU Index Fund (NYSE:EZU), both which S&P rates as Marketweight.

VGK, which is home to 439 stocks, devotes the bulk of its weight to non-eurozone nations. For example, the U.K., Switzerland and Sweden and combine for over 53 percent of the ETF's weight, according to Vanguard data.

Additionally, the PIIGS countries Portugal, Italy, Ireland, Greece and Spain combine for just 8.5 percent of VGK's weight.

Still, France and Germany figure prominently in VGK, making the fund vulnerable to dour Eurozone headlines. Germany and France, the region's two largest economies, receive weights of 13.2 percent and 14.6 percent, respectively, in VGK.

The iShares MSCI EMU Index Fund is far more concentrated on Eurozone equities than VGK. EZU's top-10 country weights, all of which are Eurozone nations, represent more than 98 percent of the ETF's weight. Of that group, France and Germany combine for nearly 62 percent of the fund's total weight. EZU features no noteworthy exposure to Cyprus or Greece, but Spain and Italy combine for 17.5 percent of the ETF's weight.

EZU and VGK are each down about one percent on Monday.

S&P Capital IQ is more bullish on the SPDR S&P International Consumer Staples Sector ETF (NYSE:IPS), which the research firm rates Market-weight with positive implications. The SPDR S&P International Consumer Staples Sector ETF is small ($34.67 million in assets) and thinly traded (average daily volume of less than 9,100 shares), but just as investors would expect with a U.S.-focused staples ETF, IPS delivers in terms of having a low beta.

IPS has a beta of just 0.43 against the S&P 500, according to State Street data.

IPS is home to 112 stocks, including spirits maker Diageo (NYSE:DEO), which S&P has a four-star rating on. Nestle (OTC:NSRGY), the world's largest food company, is the ETF's largest holding with a weight of 15.2 percent. Other top holdings include Anheuser-Busch InBev (NYSE:BUD) and Unilever (NYSE:UN).

Importantly, while IPS is an ex-U.S. play, it is not strictly a Europe play, either. Japan is the ETF's third-largest country weight while Canada and Singapore are among the other non-Europe country exposures featured in IPS. IPS has gained almost three percent in the past month.

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