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Will Europe’s Woes Harm Fund Investors?

Sept. 9, 1pm: This story has been updated  to reflect current market conditions.

For American investors who own international stock funds, the trouble in Europe is likely hitting close to home today. European stocks started falling Monday, while American markets were closed for the holiday and continued to plummet. Today, mounting concerns about the Euro zone’s financial health has helped to drag down the U.S. markets again.

As usual these days, the trouble centered around European banks and their exposure to the ongoing sovereign debt crisis. And some international stock funds are heavily exposed to Europe’s financial sector.

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There’s less variety in international stock markets than in the U.S., which means investors in broad international index funds don’t have much shelter from the current crisis in European banking. The MSCI EAFE index, a widely used benchmark for developed international funds, is roughly 20% financial stocks. The S&P 500, on the other hand, has less than 15% devoted to the sector.

Some fund managers have made even bigger bets on the financial sector, according to data provided by Standard & Poor’s, which screened international funds for high financial-sector exposure and looked for funds with big banks in their top 10 holdings. For example, the Fidelity Advisor International Value fund (FIVMX) had about 34% of its assets in financial stocks as of the end of June (the most recent filings available), and the fund counted Banco Santander, Societe Generale, and BNP Paribas among its top 10 holdings. The JPMorgan International Value fund (JFEAX) had a 24% weighting to financial stocks at the end of July, and ING was one of its top 10 holdings. The Pioneer International Value fund (PIIFX) had a slightly smaller 22% stake in financials overall, as of the end of July, but Societe Generale was one of its top 10 holdings, according to Morningstar data.

Of course, it could be worse — the impact of falling bank stocks would be higher for investors in a financial sector ETF or those who own the stocks in question directly, says Todd Rosenbluth, a mutual fund analyst with Standard & Poor’s. “These funds are going to be cushioned by their diversification,” Rosenbluth says.

But investors who own international funds should be well aware by now that the sector has been volatile this year — and the region’s debt crisis has been going on even longer than that. “If you’re seeing one of these well-known European banks in your top 10 holdings, management has decided to assume the risks related to that,” Rosenbluth says. For investors, that could make the ride a little rockier.

For a closer look at the funds in your portfolio, try Morningstar’s Instant X-Ray analysis. You can also see a fund’s sector weightings and top 10 holdings on SmartMoney.com.

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    • Well, it’s going to take quite awhile for Both the USA and then Europe and the rest of the world to dig themselves out of this mess..
      Recovery is not going to be over nite..I expect it to take at least another 3 yrs if not longer..
      Add that those ETF’s are leveraging Plays and Speculators are using them to Manipulate the markets.. and make them Twice as Volatile..
      Moving $1 Trillion On day down and The Next Day back up..That is Speculation Trading going on..
      Until that is Stopped? The markets are going to continue to be volatile..
      There are Powers that B that are trying to turn Wall Street into Vegas Street.. and Unless something is done about that? They will succeed.
      And the Long Term, B&H investor would be wise to Get out and Stay out.. Just buy Bonds, while they are still Somewhat Under Stricter Regulations..

    • Well, I can’t understand it.
      -IF your a LT and Buy and Hold Investor
      -Why would you want to Own International Stocks, let alone The Index fund or Other Int’l Funds?
      -Didnt you see or learn from 00-02′s Bear..they lost over -51% ! Gave back whatever they made the previous 5 yrs and took another 3 yrs to get even
      -Then they lost over -45% again in 08′ and they are STILL In the Hole!
      -Unless your Leverage them or Load them up when they are Down and play that Game? Your Loosing your $ investing Into Int’ls..
      -And Jack Boggle says the same..
      -Stick to your own Back Yard- The Good Ol’ USA and maybe Canada, which is just a Sub USA country.
      and Keep your $ out of Int’l .. Leave that for the Gamblers to go loose their $..
      At the most? Global Bonds! To Emerging Market Bonds.. and even then..

    • The new global economy is devastating to the idea of diversification for protection of assets from one bad sector killing one’s portfolio. Now, if Europe or Asia or the US are in the can, so goes the world. Does not make stock market investing a very viable option anymore.

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