The largely followed European stock index is the Eurostoxx 50 which represents 50 blue-chip stocks from the countries participating in the European Monetary Union. With the current Eurozone crisis, these stocks have been under heavy fire. Both the S&P 500 and the Eurostoxx 50 bounced hard from their March 2009 lows to 60%+ recoveries in price. The major difference is what happened in 2011:
The Eurozone is facing massive political headwinds, but at a dividend yield of 5.98% and P/E of 8.35, it looks relatively attractive versus the S&P 500’s 2.23% dividend yield and 12.71 P/E. Will the Eurozone unravel in a spectacular way? I doubt it, but to hedge your bets you could buy European stocks and sell US stocks in the prospect that the two will close their valuation gap. If the Eurozone truly does blow up then you would expect a liquidity black hole in which the US equity market would follow in a downward spiral. The risk is a further divergence in valuations or divergence in currencies. The latter can be hedged away by a smart investor.
What seems to be a good facilitator for this trade is the Vanguard MSCI European ETF (VGK). Current yield is 5.62% with a low 16bps fee, 13.7% exposure to European banks, and largest holding of 2.89% (Nestle).