The European Union flag flies among European Union member countries' national flags in front of the European Parliament in Strasbourg, France. © FREDERICK FLORIN, AFP, Getty Images

Europe is back.

In 2013, the economies of the Continent picked themselves up off the mat, many buoyed by the continuing pledge that the European Central Bank and its president, Mario Draghi, would do "whatever it takes" to keep the eurozone afloat.

Now, with U.S. stocks coming off a banner year and looking fairly pricey even after a rough January, Europe, broadly, has become the popular pick among investment strategists as the market to beat in 2014. That's the case despite expectations that economic growth will still be anemic. The sentiment holds that the worst is over and any growth is good growth.

What's the best way to use exchange-traded funds to play the recovery? Investors have a number of choices -- from ETFs that cover the whole region to country-specific, currency-hedged vehicles. But they come with questions and risks to consider.

Going broad abroad

For investors looking for broad coverage, there's a basic issue to consider: How do you want to define Europe?

Consider two big, diversified options: the $14.3 billion Vanguard FTSE Europe (VGK) and the $2.7 billion iShares Europe (IEV), based on the S&P Europe 350 index. There are marginal index nuances between them, and Vanguard charges 0.12 percent in expenses vs. 0.60 percent for iShares.

These funds, however, both include exposure to the U.K. and Switzerland, which operate banking systems outside the core euro zone. The two nations represented 47 percent of both funds' stockholdings as of year-end 2013.

Why does it matter if the two countries are included? "European economies and equity markets are highly correlated over longer time periods," says Susanne Alexandor, portfolio manager for Cougar Global Investments Ltd. in Toronto. "But currency movements in non-eurozone members can impact relative performance, especially over shorter time periods."

Euro purists may prefer the $8.8 billion iShares MSCI EMU ETF (EZU) or $4.9 billion SPDR Euro Stoxx 50 (FEZ), which omit Switzerland and the U.K. One difference: The former recently held shares in 241 companies, while the latter holds 50. There are also funds that use different indexing approaches. First Trust Europe AlphaDEX (FEP) selects stocks based on growth and value factors, then adjusts for country and sector weightings. WisdomTree Europe SmallCap Dividend (DFE) is based on annual cash dividends paid.

Direct hits

For those who want to go with individual countries, Germany and the U.K. have emerged as the popular choices for ETF investors. Both countries expect to grow in 2014: Germany, on the back of exports, and the U.K., thanks to recovering banks and a watchful central bank.

Many asset managers are also focusing on those two economies. For instance, Stephen J. Cucchiaro, chief investment officer of Windhaven, an $18.5 billion advisory firm within Charles Schwab (SCHW), overweighted Germany and the U.K. in mid-2013. He says Windhaven hasn't yet expanded client holdings to other European countries.

Alexandor of Cougar Global says her firm is looking at other European economies, but hasn't yet invested outside of Germany, through iShares MSCI Germany (EWG), and the U.K., via iShares MSCI United Kingdom (EWU).

Of Europe's other major economies, analysts have yet to come back around to France or Switzerland as country-focused investments. "There are good companies operating in France, but government policies are not as market-friendly, and Switzerland is burdened by a very high Swiss franc," Alexandor says.

As for the rest of the pack, while single-country funds exist for almost every European country (sorry, Luxembourg!), many of them are too small or illiquid -- both the fund and the underlying investments -- for professional money managers to consider. Take this as a warning. Often, the smaller-country ETFs are dominated by one company or industry. The indexes themselves are even "capped" to adjust for this anomaly.

If you want to monitor smaller economies for potential winners, "keep an eye on European fixed-income markets for indicators on the peripheral countries," Alexandor says.

Recently, Ireland and Portugal have issued public debt as interest rates demanded by the market moved significantly below crisis levels. Despite the progress, neither country is currently in Cougar's sights.

Among other markets, Alexandor is monitoring Poland, whose economy is closely tied to Germany's, and the iShares MSCI Poland Capped (EPOL) fund.

Something else to consider: With most foreign-stock funds, investors get exposure to the currencies in which the securities are denominated. That boosts returns if the currencies appreciate relative to the dollar, and it saps performance if those foreign currencies weaken.

For investors who want to invest in European stocks without currency exposure, WisdomTree Investments (WETF) and Deutsche Bank (DB) offer ETFs that hedge short-term moves in the euro, British pound, Swiss franc and others. Only WisdomTree Europe Hedged Equity (HEDJ), at $731 million in assets, has garnered much investor interest.

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