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Bet On European Banks With These ETFs

August 23, 2013 2:37 pm
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Bet On European Banks With These ETFs

No need for a double take. Europe ETFs have recently been in rally mode and, believe it or not, once-toxic European banks have been contributing to that rally in significant fashion.

For example, Banco Santander (NYSE: SAN), one of the most controversial European banks and 19.5 percent of the iShares MSCI Spain Capped ETFs (NYSE: EWP) weight, has surged 11 percent in just the past month.

Some top fund managers have been getting bullish on European banks. "If you look at our portfolio, we're most overweight Europe and within that, European financials," said David Herro, manager of the $21 billion Oakmark International Fund, in a CNBC interview earlier this week.

Banks that Herro has recently purchased include Credit Suisse (NYSE: CS), Lloyds, Allianz, Intesa Sanpaolo and BNP Paribas, according to CNBC.

Related: Europe ETFs Draw Bullish Praise.

Investors looking to construct their own ETF portfolio chock full of European banks have some interesting options, including the following funds.

iShares MSCI Europe Financials ETF (NASDAQ: EUFN)
The iShares MSCI Europe Financials ETF is not the most talked about Europe ETF, but it is one of the better performers of the lot with a year-to-date gain of 10.6 percent.

EUFN now has $182.5 million in assets under management, but the fund stands as another shining example of the risks associated with ignoring small ETFs. Not only has the fund performed well this year, but the bulk of its AUM total (over $142 million) has come into the fund since the start of the year. Investors that got hung on EUFN's size late last year missed out on some easy money.

HSBC (NYSE: HBC) is EUFN's largest holding at 11.7 percent. Other top-10 holdings include Allianz, Credit Suisse and UBS (NYSE: UBS).

First Trust STOXX European Select Dividend Index Fund (NYSE: FDD)
The First Trust STOXX European Select Dividend Index Fund is not a dedicated financial services ETF, but the sector is the fund's largest at 33.7 percent. That is roughly 1,400 basis points larger than FDD's allocation to utilities stocks. As is the case with most diversified Europe ETFs that heavy on bank stocks, the U.K. and Switzerland loom large in FDD, combing for 48 percent of the fund's weight. France is in between the two at 15.4 percent.

The numbers pertaining to FDD are a compelling valuation (price-to-book ratio of less than 1.4) and a juicy 30-day SEC yield of nearly 6.4 percent. FDD is up 2.3 percent in the past month.

SPDR S&P International Financial Sector ETF (NYSE: IPF)
With just $6.25 million in AUM, IPF might be too small for even adventurous investors to handle, but most of the fund's 132 holdings would qualify as "heavily traded," ensuring decent liquidity. That point is proven by the fact that IPF rarely trades at a premium or discount to its net asset value of more than half a percent, according to State Street data.

IPF is not a pure Europe fund as Japan, Canada, Australia and Hong Kong combine for about 46 percent of the ETF's weight. However, the U.K., Switzerland, Germany and France combine for a third of IPF's weight and four of the ETF's top-10 holdings are Europe-based. 30-day SEC yield: 2.25 percent. Price-to-book ratio: 1.04.

For more on ETFs, click here.

Disclosure: Author is long FDD.

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