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Eric Dutram

Spain ETF: Here We Go Again

EWP

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Thanks to recent moves by the ECB, and especially the promise by Draghi to buy up sovereign debt if highly indebted nations ask for the help, European stocks have been back on track in recent weeks. Prices for a variety of European-based stocks and European ETFs have been strong performers to end the third quarter of the year, suggesting that the mere threat of bond buying may have been enough to stave off a true crisis (see Are The Troubled European ETFs Back on Track?).

This temporarily put many investors focused in on the region at ease, allowing many to worry about other issues for the time being. Yet while it appeared to be somewhat of an end to the crisis, it may have actually just been the eye of the storm, as evidenced by the recent anti-austerity protests in Greece, and especially Spain.

Spain Crisis

The country of Spain, one of the largest economies in the world, was at the brink just a few months ago before some key steps were taken by important forces in the EU. However, protests are already starting to appear over a proposed, austerity heavy budget while there are also concerns that the nation may also face a growing separatist movement from the rich eastern state of Catalonia—home of Barcelona-- to further add to the national woes.

It also remains to be seen how much austerity a country that has an unemployment rate of 25% can actually endure, as further measures that put more people out of jobs are unlikely to be well-received with this kind of economic backdrop (read Three Resilient European ETFs Still Going Strong).

Clearly, the crisis in Spain is nowhere near the finish line, as evidenced by the intense protests in Madrid and the sovereign bond rates that are now trending back up towards the 6% mark. Add in worries over debt downgrades and an independent audit of Spain’s banks in the very near future, and it now is pretty clear that those who thought an end to the crisis was at hand were naïve at best.

Thanks to this uncertainty investors should look for one of the only pure play ways to target the country, the iShares MSCI Spain Index Fund (EWP - ETF report), to be in focus once again. The product was down about 4.4% in just the first few days of the pre-budget protests on high volume, suggesting that the ETF could be in for some pain once again if the crisis continues to escalate.

This could be especially true for ETF investors thanks to the holdings breakdown of EWP which is heavily skewed towards financial securities, in other words, one of the segments most impacted by the current malaise. In fact, two of the top three holdings are banks, while financials account for 42% of the assets in total.

Beyond these two segments, telecoms and utilities make up another 40% combined, so at least there is some semblance of safety in the product, even if financials face more scrutiny. Additionally, the 30-Day SEC yield is quite robust at 4.7%, suggesting that the payout could be a nice backstop against further losses (see How to Play the Spain ETF (And the Euro Zone Slump)).

Investors should also note that the current price trajectory of the fund represents somewhat of a disappointing trend for EWP, as the product, in most of August and September, recouped nearly all of the losses that it suffered in the rough stretch from April-July. In fact, even with the recent slump, EWP is still up over 25% in the trailing three month period, although the Spanish ETF is still down over 8% on a year-to-date look.

Clearly, investors who are looking to trade—or are bold enough to invest in EWP at this time—need to pay a great deal of attention to political events in the nation for clues on the country’s direction going forward (also read Pain in the Spain ETF Continues).

The Spanish government has to walk a very difficult balancing act between austerity and anarchy, so while gains could be had in the Spanish ETF in the short term, it is clear that the nation is still a very risky market, even with some of the key developments in recent months by the ECB. This suggests that while the ECB can help, it may not always be a perfect substitute for a better economic environment, and that we may still be in the depths of this crisis in the PIIGS markets after all.

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