After enduring a brutal sovereign debt crisis and the longest recession in the postwar era, Europe finally looks like an attractive destination for stock investors again. Recent returns have lagged: The benchmark Stoxx Europe 600 index has risen by just 16% over the past 12 months, well below the returns in red-hot U.S. market indexes over the same period. But many market pros are now predicting that those tables will be turned in 2014, providing U.S. investors with an opportunity to profit from the eurozone’s ongoing resurgence. The trick is to make sure that any potential gains aren’t wiped out by currency swings.
The most compelling reason to look at Europe now is that its flagship companies appear to be relatively cheap. Large-cap European stocks are currently trading at about 12 times estimated 2014 earnings, compared with 14 times for their large American counterparts. And while the overall eurozone economy is expected to grow at a fairly tepid pace of 1% this year, Goldman Sachs estimates that earnings per share for large European companies will expand at a far brisker rate of 14% in 2014. Citibank chief global strategist Robert Buckland believes that strong earnings growth will help propel the Stoxx 600 index up by another 12% from current levels by the end of 2014; his estimate for the S&P 500 is a mere 8% gain.
European exporters could even receive an extra earnings jolt in the coming months. To prevent the economic recovery from losing steam, the European Central Bank continues to keep monetary policy loose and interest rates ultralow. But in the U.S., the Federal Reserve recently began tapering its quantitative easing program. As a result, many experts expect the euro to weaken against the U.S. dollar this year. Morgan Stanley strategist Ian Stannard, for instance, expects the euro to fall by 10% against the dollar in 2014. And since a declining euro makes European goods sold abroad cheaper, sales for eurozone exporters could get a major boost.
But for American investors holding European shares, a falling euro could slash returns: Any gains would be worth less when converted back to U.S. dollars. To avoid this fate, consider WisdomTree Europe Hedged Equity ETF. This exchange-traded fund uses futures contracts to neutralize the impact of a declining euro and offers exposure to about 120 large-cap European companies, most of which are major exporters. Top holdings include automaker Daimler, drugmaker Sanofi, and consumer products behemoth Unilever.
Another low-cost option with built-in currency hedging is db X-Trackers MSCI Germany Hedged Equity, an ETF that focuses on companies from Europe’s largest economy and biggest exporter. The fund holds 55 large-cap German stocks — top holdings include Daimler, conglomerate Siemens, and chemicals giant BASF — and pays a healthy 3.3% dividend yield. It’s a more concentrated way to play Europe’s rebound.
A former compensation consultant, Janice Revell has been writing about personal finance since 2000.
This story is from the February 3, 2014 issue of Fortune.
