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How to Invest in a Relieved Europe

Investors looking to get in on the sudden burst of euphoria over European debt don’t have many options. But there are other ways to invest in a relieved Europe.

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Stocks in Europe and the U.S. rallied today on the news that European leaders convinced banks to take a 50% “haircut” on Greek debt, and have agreed amongst themselves to greatly increase the European Financial Stability Facility’s emergency fund.

Markets reacted immediately to the news. The Stoxx Europe 600 index rose 3.58%, and the S&P 500 was up 3.65% by late afternoon. While there aren’t any exchange-traded funds specifically focused on European bonds, analysts say those searching for a sliver of the action could try broad European ETFs, which saw strong gains today. The $1 billion iShares S&P Europe 350 Index ETF (IEV) and the $2.64 billion Vanguard MSCI Europe ETF (VGK) were each up more than 6% for the day. More narrowly targeted funds did even better: The euro-zone only SPDR Euro Stoxx 50 ETF (FEZ) rose more than 8%, and the tiny $10 million iShares MSCI Europe Financials Index ETF (EUFN) saw a nearly 12% gain for the day, leaving it up almost 20% for the past month.

So is this bacchanalia over? Some advisers and analysts see more potential for gains ahead. “I think you’ve got the early stages of a rally here,” says Herb Morgan, the chief investment officer of Efficient Market Advisors. The deal sharply reduces the probability of a recession in Europe, so stocks there could continue to rise, Morgan says. If this deal truly marks the end of the crisis, then there’s plenty more upside to come, says Tim Strauts, an ETF analyst with Morningstar. “Europe in general has been trading at depressed levels versus other world regions,” Strauts says. “If you think the crisis is over, then Europe is a value right now.”

But that’s only if the crisis is really over, Strauts says. There are still some details of the deal that remain to be worked out, and some questions that haven’t been answered, he says. “For myself I wouldn’t be a big buyer here, because I think the risks are still high,” Strauts says.

Individual investors generally shouldn’t try to buy on headlines, says Alec Young, an equity strategist with Standard & Poor’s. Investors should instead stick to a rebalancing discipline that forces them to buy things when they’re cheap and sell when things get overheated, Young says. “This type of performance is never sustainable,” he says.

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