Ukraine War Takes Toll on Vanguard FTSE Europe ETF (VGK)

As Robert Burns wrote in his poem To a Mouse, "The best laid schemes o' Mice an' Men" often go awry.

Last year, we added Vanguard FTSE Europe ETF (VGK) to the Kiplinger ETF 20, our list of the best cheap exchange-traded funds (ETFs) you can buy, because of expectations for an economic recovery.

We were right, for a while. Then Russia invaded Ukraine in February, and that changed everything. European stocks plummeted – in some markets falling to bear-market territory – before recovering some in March.

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Vanguard FTSE Europe ETF, which tracks an index of foreign stocks in developed European countries, is down 8.9% so far in 2022, essentially wiping out any upside recorded in prior months. As a result, over the past 12 months the ETF's return is down a bit with a 1.6% loss. But that’s better than the 3.0% average decline in the typical Europe stock fund and the MSCI EAFE, an index of stocks in developed foreign countries. (All returns are through April 8.)

Ireland, Sweden and the Netherlands were a drag, with declines of 13% or more over the past 12 months, while Norway, Denmark and Switzerland stayed above water, with better than 11% returns for the period. The ETF's top countries are the U.K., Switzerland, France and Germany.

Now the outlook for economic prosperity in Europe has dimmed. Higher commodity prices, especially for oil, will hamper European growth, given the region's dependence on Russian energy, says Shaan Raithatha, a U.K.–based economist at Vanguard. The eurozone gets 40% of its natural gas and 25% of its oil from Russia, more than the U.S. and the U.K.

"Persistently higher energy prices affect growth," he says, because consumers are left with less money to spend on other things. “They also weigh on profit margins, leaving businesses less to reinvest." Crude oil prices have climbed more than 30% since the start of 2022.

Raithatha has trimmed his expectations for European economic growth in 2022, albeit by one percentage point, to around 3%. And he expects an average of 8% inflation in 2022 in the developed countries of Europe.

We're watching this fund closely. In its favor, however, is the fund's underlying index, the FTSE Developed Europe All Cap, which includes stocks of all sizes in 16 developed European markets. In short, the ETF offers broad exposure to the region. Another plus: The fund's 0.08% expense ratio is "paper thin," says Morningstar analyst Ryan Jackson.