Is it time for investors to bail big time on western Europe?

With the right combination of funds, it’s possible to build a portfolio that sidesteps most of that part of the world. In the process, you’ll gain valuable pieces of the emerging stock and bond markets and small companies in the U.S.

It doesn’t look like there will be major relief any time soon from the debt migraines from Greece, Italy, Spain and Portugal. The contagion now has spread to push borrowing costs higher for France and Spain.

To sidestep the problems, or diversify your portfolio away from the chaos, you can build an “Anything But Europe” investment strategy. Here are some suggestions for that approach:

Think emerging markets. Developing countries that fit into this definition have tangential connections to Europe and are still growing. A good vehicle is the iShares MSCI Emerging Markets ETF. It concentrates more than half of its portfolio in four countries China, Brazil, South Korea and Taiwan but is a good way to sample developing countries.

The BRIC strategy. The iShares MSCI BRIC Index Fund is one approach to investing in Brazil, Russia, India and China, although it invests about two-thirds of its holdings in China and Brazil. Those two countries are targeted to grow in coming years, and they have a symbiotic relationship. China needs Brazil’s agriculture output and other resources for its increasing population. Brazil is relying upon China as a key export market for commodities such as soybeans.

Emerging-markets debt. Since the European bond market is mostly in turmoil over sovereign debt, you can avoid most of the fray by investing in emerging-market bonds. The PowerShares Emerging Markets Sovereign Debt Portfolio invests in bonds from countries like Indonesia, Colombia, Qatar and Turkey.

U.S. small companies. While they are especially sensitive to economic conditions, small-cap companies may be good holdings to have long term since bigger, multinational companies tend to have larger European exposure. A broad-basket index fund such as the Vanguard Small-Cap ETF is worth considering.

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