War in Ukraine wreaks havoc on Vanguard FTSE Europe ETF (VGK)

As Robert Burns wrote in his poem to a mouse“The best-laid plans of mice and men” often go awry.

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

We were right, for a while. Then Russia invaded Ukraine in February, and that changed everything. European stocks fell – with some markets falling into bearish territory – before recovering in March.

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

Ireland, Sweden and the Netherlands were a drag, with declines of 13% or more in the past 12 months, while Norway, Denmark and Switzerland remained above water , with returns above 11% for the period. The main ETF countries are the UK, Switzerland, France and Germany.

Today, the prospects for economic prosperity in Europe have darkened. Rising commodity prices, especially oil, will hamper European growth, given the region’s dependence on Russian energy, says Shaan Raithatha, UK economist at Vanguard. The Eurozone gets 40% of its natural gas and 25% of its oil from Russia, more than the US and UK

“Constantly higher energy prices affect growth,” he says, as consumers find themselves with less money to spend on other things. “They also weigh on profit margins, leaving companies less to reinvest.” Crude oil prices have climbed more than 30% since the start of 2022.

Raithatha has cut its expectations for European economic growth in 2022, albeit by one percentage point, to around 3%. And he is counting on an average inflation of 8% in 2022 in the developed countries of Europe.

We are monitoring 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 across 16 developed European markets. In short, the ETF provides broad exposure to the region. Another plus: The fund’s 0.08% expense ratio is “paper thin,” says Morningstar analyst Ryan Jackson.

Mary I. Bruner