Despite a number of bailouts, Europe’s woes are intensifying as the focus continues to be on Greece and Spain as they attempt to stop the slide in their economies. Beyond these countries and the rest of the PIIGS bloc, however, concerns are also beginning to build over a number of other large markets, specifically in the case of France.

In the second biggest economy of the euro zone, budget deficits and unfavorable demographics are prominent. Thanks in part to these issues, as well as the general slowdown and relative lack of competitiveness of the French economy, the nation failed to grow at all in the first quarter.

In addition to this lack of growth, the unemployment rate surged to 10%, reaching the highest level in more than 12 years. Furthermore, Standard & Poor downgraded the country’s credit rating to AA+ from AAA due to its rising debt and weak economy, although it still retains a ‘AAA’ rating from the other two major agencies at this time.

While the backdrop may not be very promising, the France CAC 40 Index (considered the country’s benchmark) has grown more than 6% in the first quarter. This is reflective of solid performance, considering the weakness in other developed European markets (Read: Three European ETFs That Have Held Their Ground). Even iShares MSCI France Index Fund (EWQ) generated excellent returns of 12.12% in the first quarter.

However, the fund has since underperformed after the victory of the new president - Francois Hollande - in May, sending year-to-date returns to the negative territory. This has also been reflected in the aforementioned EWQ, which has plunged as of late and is underperforming many of its neighbors at this time.

This comes despite the relatively high level of concentration that the fund exhibits in its biggest companies. In fact, the product holds 74 securities in total and puts about 50% of the assets in the top 10 companies.

Total SA and Sanofi are the key elements in the basket with 11% and 10% share, respectively. With AUM of about $248.4 million, the product is skewed towards the industrial sector followed by financials and the consumer discretionary space. (Read: Three Industrial ETFs Outperforming XLI)

While giant and large companies hold more than 86% of the assets, mid companies take the rest of the position in the basket. The product is quite inexpensive, charging 52 bps in fees per year and trades with good volumes of about 6,000,000 shares on average on a daily basis.

The fund yields an annual dividend of 3.54%, reflecting strong commitments to enhance investors’ returns. It offers ample flexibility as investors can trade using derivative instruments and lends out one-third of the portfolio securities. This strategy often put a limit to loss and can generate additional income even in the face of economic and political insecurity. (See more ETFs in the Zacks ETF Center)

Yet while the high dividend yield and focus on large caps may be promising, investors need to keep the broad economic conditions in mind before purchasing or even considering this product. Although events are not as good as they are in Germany, France is arguably much better off than any member of the PIIGS bloc at this time.

The ruling of Hollande also poses a significant challenge to the French economy, as some are not satisfied with the president’s walk away from austerity measures and his promise to focus more on spending. The reduction in austerity packages and increase in taxes will certainly disrupt the fiscal and monetary policies laid by Merkel, the chancellor of Germany, and Sarkozy, ex-president of France.

France Outlook

After growing at an average rate of 1.7% last year, France, is expected to slow down to 0.5% this year. However, many forecast this to just be a temporary drop as the economy will, according to the IMF, rebound to a 1% growth next year. Meanwhile, inflation remains low at 2.1% as interest rates are also low at 1.0%, suggesting that the country still has policy tools at its disposal, although monetary policy decisions still originate out of Frankfurt.

Though the country is making several efforts to narrow its budget deficit from 5.2% of GDP in 2011 to 4.4% in 2012 and 3% in 2013, the thinning of this gap remains a question at present. The European Union fears that the budget deficit will be higher than expected and will put Europe in a danger zone in 2013. (Read: Spanish Bailout: Did It Help European ETFs?)

It also doesn’t help that the country has high bank exposure to a number of PIIGS economies, as well as its own uncertain economy, and heavy trade dependence on a number of weak markets including Belgium and Italy.

Given these issues, we believe France’s economic and political conditions are not very promising and show no signs of turning around in the near future (Read: Three European ETFs Beyond The Euro Zone). While EWQ may be promising from a dividend perspective, the lack of concern over the budget deficit, as well as the weakened state of many of the country’s top partners, suggests that the product should probably be avoided at this time until more certainty is realized on the country’s economic future.

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