Europe is in recovery mode. At least, that seems to be the prevailing sentiment these days.

A survey of fund managers reported by the Financial Times recently showed that interest has shifted away from emerging markets and back toward developed ones.

The FT also reported that Bank of America said portfolio managers believe “overwhelmingly” that Europe’s economies will strengthen over the next 12 months.

If they’re right, now’s the time to start investing in Europe.

Let’s take a look at a few ways to capitalize on the improving economic landscape in Europe…

Hedge Your Bets

Back in the good ol’ days, hedging meant, well, hedging. A “hedge fund” was so named because it utilized strategies to reduce risk.

Today, many hedge funds are more akin to go-anywhere funds. They often have no clearly stated limit as to what they can invest in or what strategy they’re allowed to employ.

And very often they aren’t “hedged” at all.

But for many of us, being hedged is a desirable characteristic, as it’s supposed to make investing our money safer.

For those interested in riding the European economic escalator higher, a good place to start is the db X-trackers MSCI EAFE Hedged Equity Fund (DBEF ).

DBEF hedges the fund against currency risk…

You see, all foreign investing has an added element of risk, because changes in the exchange value of currencies – say the U.S. dollar versus the euro – can cause an investment to lose value, regardless of underlying performance.

So DBEF should provide a less-risky alternative to non-hedged ETFs that track the same index, the MSCI EAFE US Dollar Hedged Index – a well-known, diversified index with exposure to countries like the United Kingdom, France, Switzerland and Germany.

But remember, EAFE stands for “Europe, Asia, Far East,” so there’s also exposure to Japan and Australia.

It’s something to consider before investing in the fund. So make sure to compare your current allocation to the fund’s to prevent against any unwanted overlap.

Two Pure Euro Plays

But a more pure-play European option would be the Vanguard FTSE Europe ETF (VGK ).

Its expenses are low at 0.12% and its dividend yield is an impressive 5.52%, which is more than double DBEF’s 3.18%.

Better still, VGK focuses on large- and mid-cap stocks, which makes it a good complement to the next ETF, the small-cap focused WisdomTree Europe SmallCap Dividend Fund (DFE ).

The fund is also all about Europe and, as its name declares, it invests in smaller companies.

And as we’ve found in some other small-cap ETFs recently, DFE is no slouch in the dividend department.

It has a respectable current dividend yield of 3.32%, which, like VGK, is also better than DBEF…

And if the European recovery does continue, then DFE should do very well, because small-cap stocks often outperform large and mid caps during recoveries.

However, I do wonder if those fund managers referenced in the Financial Times above are getting a little ahead of themselves.

There’s certainly reason for optimism, and Europe may look a whole lot better in 12 months, but that’s no reason to dive in head first.

Nevertheless, despite my lingering concerns, there’s one simple fact that supports investing in Europe: Proper asset allocation requires exposure to as many regions as possible – that’s what diversification is all about.

These three funds are both distinct from and complementary to each other, so they could be used in conjunction to form the basis of the European segment of your portfolio.