Vanguard European Stock (AMEX: VGK, $79.32)

Over the past few years, European stocks have enjoyed a decided edge over their American counterparts. In fact, the S&P Europe 350 Index has delivered average annualized gains of +25% over the last three years, for a cumulative return of about +95% — more than double the +47% return of the S&P 500. 

Thanks in large part to sweeping regulatory reforms, economic growth across the European Union is forecast to reach 2.7% this year — well above the +2.1% pace in the U.S. Of course, it doesn't hurt that the dollar just slipped to a new record low against the Euro last week. Many economists anticipate the greenback will continue to weaken against the Euro, which will magnify the gains of any Euro-denominated assets.

And with VGK opting not to hedge any of its currency exposure, that favorable tailwind helped the fund post a solid +33% return last year. In addition, shareholders have already enjoyed another +12% gain through the first half of 2007. Both of those figures easily outpace the broader MSCI EAFE Index, and also stack up well against the average European-focused stock fund.

VGK tracks the performance of the MSCI Europe Index, which offers broad exposure to a basket of nearly 600 companies based in France, Germany, Switzerland, the U.K. and elsewhere throughout Western Europe. The fund shies away from riskier emerging markets in Eastern Europe, and focuses on stable mega-cap leaders like Nestle, Vodafone, Royal Dutch Shell and Nokia.

As such, VGK might lag behind others when emerging market stocks and small-caps are hot, but the fund should offer some shelter when those areas head south. Since inception in March 2005, the fund has delivered positive returns in 8 of 9 quarters.

With a light expense ratio of just 0.18% and almost zero turnover, this fund offers investors a low-cost, tax-efficient way to invest in many of Europe's most dominant companies. We are not taking a stake at this time, but will be monitoring the fund and the European market in the months ahead. Should we decide to add VGK to one of our portfolios, you will be the first to know.