ETFs to Sidestep European Debt Crisis

NEW YORK (TheStreet) -- Europe's sovereign debt crisis has threatened to upend the strategy of global diversification, leaving investors to wonder how to assess what's happening and how to invest around this event.

A crucial ingredient for long-term investment success is figuring out what to avoid. Thanks to ETF specialization, investors can sidestep the worst countries. Four Mediterranean countries carry debt levels that exceed European Union requirements: Greece, Italy, Portugal and Spain. It may take years for those countries to get healthy again.

Governments of the countries that use the euro agreed over the weekend to lend as much as $962 billion for struggling member nations. The European Central Bank said it will buy government and private debt. After the announcement, stocks surged.

Last fall, I wrote favorably about the new GlobalX Nordic 30 ETF(GXF) because it invests in the strongest European countries. In contrast, iShares MSCI Spain(EWP), iShares MSCI Italy(EWI), iShares MSCI United Kingdom(EWU) and the new iShares MSCI Ireland(EIRL) are on shaky ground. That means iShares MSCI Germany(EWG) and iShares MSCI France(EWQ), representing the region's most fiscally prudent countries, also will be hurt.

The two best ETF choices for European exposure are GlobalX Nordic 30 ETF and the iShares MSCI Switzerland(EWL). Both funds have outperformed the other iShares single-country funds since the Nordic 30 ETF debuted last fall.

Switzerland and the Nordic region aren't without risk. We learned at the height of the crisis that Swiss banks are bigger than Switzerland's economy. That means iShares MSCI Switzerland will get hit hard if its banks suffer. Sweden is the largest country in the Nordic 30 ETF, and its banks have a lot of exposure to Latvia, which could be problematic if things flare up again. Finland is part of the euro, so some sort of extreme outcome not being factored in now could also cause problems for this ETF.

But, for now, those countries are riding high compared with what's happening in southern Europe.

More on Europe's Debt Crisis

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