5 Funds to Prosper From an Upswing in European Stocks

This summer, the strong dollar is inspiring many Americans to visit Amsterdam, Paris and Rome. You may want to consider some European exposure for your portfolio, too.

Many market strategists see good times ahead for European stocks, which are already being buoyed by a massive bond-buying program launched by the European Central Bank in January. This "quantitative easing" is driving down bond yields in the region and pushing income investors into European dividend stocks. In the meantime, the euro's weakness helps export-oriented European companies boost their revenues.

Fund managers who can invest in many parts of the globe are making big bets on European stocks. Oakmark International Fund, for example, had roughly 80% of assets in Europe at the end of the first quarter, while Henderson Global Equity Income Fund had about 65% of assets in Europe at the end of April.

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Investors are hoping to see another version of the movie that just finished playing in the U.S. The Federal Reserve's bond-buying program stretched from 2009 to late last year, a very strong period for U.S. stocks. A clearly communicated central bank bond-buying program is "a nice recipe for equity markets," says Sean Lynch, co-head of global equity strategy at Wells Fargo Investment Institute, which is overweighting international developed-market equities, including Europe.

To be sure, there are risks: Greece's debt problems could send tremors through European stocks. If the dollar continues to strengthen against the euro, that would crimp the returns of U.S. investors. And European stocks have already moved higher this year.

Although they've outpaced U.S. stocks this year, European stocks haven't enjoyed the roaring gains seen in the U.S. market over the past five years, and their valuations still look relatively attractive, analysts say. And European stocks offer a dividend yield of more than 3%, compared with just over 2% in the U.S. Companies in the Euro Stoxx 50 Index posted a 15.7% year-over-year increase in dividends in the first quarter, compared with 14.8% for Standard & Poor's 500-stock index, according to Wells Fargo.

Plus, in Europe, "the high-yielding areas are cheaper than they are in the U.S.," says Ben Lofthouse, co-portfolio manager of the Henderson fund. The fund focuses on stocks with dividend yields of at least 2.5%. Holdings include several European telecommunications companies and consumer discretionary stocks such as German fashion retailer Hugo Boss.

The Best Funds for a European Jaunt

Before diving into European stocks, check how much exposure you already have to the region. As the Oakmark and Henderson funds show, a global fund may already be giving you plenty of European stocks.

Exchange-traded funds offer low-cost access to European stocks, but some cover more of the market than others. ETFs such as SPDR Euro Stoxx 50 (symbol FEZ) and iShares MSCI EMU (EZU) only include Eurozone stocks, so they exclude the United Kingdom and Switzerland, which account for almost half of the total market capitalization of European developed markets.

Vanguard FTSE Europe ETF (VGK), meanwhile, "offers very broad exposure to the European market," says Alex Bryan, an analyst at investment-research firm Morningstar. The ETF includes stocks listed in the U.K. and Switzerland, so it's less sensitive to the euro's ups and downs.

Investors who believe the dollar will continue to strengthen can also choose ETFs that hedge against currency fluctuations, such as Deutsche X-trackers MSCI Europe Hedged Equity (DBEU) and WisdomTree Europe Hedged Equity (HEDJ). But these funds may not be as tax-efficient as unhedged funds, since they must distribute taxable gains on the "forward" contracts they hold as currency hedges. And unhedged funds' foreign currency exposure can improve the diversification of your overall portfolio, Bryan says.