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Luxenberg: A Surge of Cash Into European Funds

NEW YORK ( TheStreet) -- After struggling for years, European stocks are beginning to recover. This year iShares Europe (IEV) rose 19.5%. Investors have taken notice. Vanguard FTSE Europe ETF (VGK) attracted inflows of $6 billion in 2013, a large sum for an ETF with $12.4 billion in assets. A total of $3.7 billion flowed into iShares MSCI EMU (EZU), which has $6.6 billion in assets.

Positive news triggered the rally. The eurozone's GDP grew 0.3% in the second quarter of 2013, an indication that the protracted recession had ended. Now the European Union projects that GDP will grow 1.1% in 2014. While the recovery remains fragile, there is good reason to think that the rebound can continue, says Shep Perkins, portfolio manager of Putnam Global Equity (PEQUX), a mutual fund. In Spain and some other countries, the unemployment rate has begun to fall. "The unemployment problem is still horrendous, but consumer confidence is starting to recover from a low level," he says.

Perkins says that European corporate profits are still 40% below the peak reached in 2007. But he says that earnings will make up the lost ground because managements have been jolted into restructuring. Before the crisis, many boards of directors tolerated inefficiencies and high labor costs. Faced with financial turmoil, companies have been streamlining operations. Perkins cites the example of Deutsche Post DHL, a German giant that delivers mail and packages. At the height of the euro crisis, the company brought in new management that cut costs and focused on strong businesses. Profit margins increased and the stock climbed. The company should continue improving, Perkins says. "Now that the economy is stabilizing there will be more benefits from restructuring," he says.

With stocks climbing, iShares MSCI EMU has ranked among the top performers, returning 31.8% in the past year. During the same time, Vanguard FTSE Europe returned 26.9%. But most investors who want to bet on the rebound of Europe should stick with the Vanguard fund, says Dennis Hudachek, an ETF analyst for IndexUniverse.com. Vanguard provides comprehensive coverage of all developed European countries, he says. The iShares fund focuses on countries that use the euro. "If you stick to the eurozone, you exclude the United Kingdom, Switzerland, and Sweden -- and those countries account for about half the total market capitalization of Europe," Hudachek says.
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