The Euro zone has seen weak GDP growth for yet another quarter, dropping 0.2% in Q1. Though this marks an improvement from the previous quarter’s decline of -0.6%, it is yet another major blow for the single currency bloc struggling to rebound from a debt crisis.
The region is facing increased hurdles from the need to restructure domestic markets and the impact of sluggish world trade growth, in particular from weak demand from emerging markets.
Increasing unemployment, tumbling inflation and fiscal tightening are already impacting domestic consumption in the region. Moreover, a rising Euro has made European exports expensive, hurting their competitiveness (read: Has the Euro ETF Bottomed Out?).
Unemployment across the Euro zone has reached a record high of 12.1%, well above the whole of European Union rate of 10.9%. In fact, Greece and Spain have a higher unemployment rate of 27.2% and 26.7%, respectively, followed by Portugal at 17.7% and Italy at 11.5%.
The Long Recession
While the recession is not as deep as what we saw in the aftermath of the financial crisis of 2008–09, it is the longest recession in the 14-year history of the Euro, with the region being in recession since Q4 of 2011.
While the crisis was initially contained to two of the troubled PIIGS - Greece and Portugal-- the malaise is now spreading to the other core economies with France being the latest addition to the list (read: Time to Sell the France ETF?).
According to the data from the European Union, nine of the 17 Euro zone countries are now in recession. France, Europe's second largest economy, has experienced a recession for the second time in four years, while Germany recorded weak growth of 0.1% in the first quarter.
Greece is in its sixth year of recession with the economy shrinking by 5.3%, while the Spanish and Italian economies contracted by 0.5% each. Meanwhile, the economies of Finland, Cyprus, the Netherlands and Portugal also shrank in the same time-frame, suggesting broad based weakness across the bloc.
Will ECB Succeed In Escaping Recession?
In order to avoid falling into a deeper recession, the European Central Bank (ECB) cut its benchmark interest rate this month by a quarter percentage point to a record low of 0.50% (read: ECB Rate Cut: How Did It Impact Euro ETFs?).
Further, the ECB has promised to provide ample liquidity to the Euro zone banks until next July in an effort to support the recession hit economy. It also seeks to support smaller companies which were affected by poor liquidity conditions.
However, the ECB expects that the economy would not show any improvement until the second half of the year. But with such poor economic data, recovery even in the second half of the year could be elusive.
Euro zone ETFs to Avoid
In such a backdrop, we recommend investors keep away from euro zone ETFs at least for the short term. Though these funds have generated decent returns so far in the year, there is no guarantee of a further surge given the bearish fundamentals for these economies.
Below, we take a closer look at some of the ETFs that have the largest exposure to the Euro zone economies and thus could be European ETFs to avoid this summer (see more ETFs in the Zacks ETF Center).
SPDR EURO STOXX 50 ETF (FEZ - ETF report)
This fund seeks to match the price and yield of the EURO STOXX 50 Index, before fees and expenses. The index measures the performance of some of the largest companies across the components of the 20 EURO STOXX Supersector Indexes.
Holding 55 securities in its basket, the product puts less than 40% of its assets in top 10 holdings. The ETF is skewed towards financials, as it takes roughly one-fourth of the total assets, while healthcare, consumer staples and industrials round to the next three spots.
In terms of country allocations, France and Germany are at the top position with 37.51% and 31.90% share, respectively, followed by Spain (11.71%), Italy (7.77%), the Netherlands (7.01%), Belgium (3.35%) and Ireland (0.71%) (read: More Trouble Ahead for Italy and Spain ETFs?).
Launched in October 2002, this is one of the largest and most popular ETFs in the European space. The fund appears rich with AUM of over $2.2 billion, and average daily volume of roughly 810,000 shares. The ETF charges 29 bps in fees per year from investors.
The fund returned about 4.21% so far in the year. FEZ currently has a Zacks ETF Rank of #3 or ‘Hold’.
iShares MSCI EMU Index Fund (EZU - ETF report)
Like FEZ, this fund is also one of the more popular ones in the space with AUM of $2.2 billion while charging investors 0.50% in annual fees. The ETF tracks the MSCI EMU index, which measures the performance of the equity markets of the EMU member countries (those European Union members that use the Euro as its currency).
The fund holds about 250 securities in its basket which is pretty spread across each security, as no single firm holds more than 4% of the assets. From a sector look, the product has a diverse approach with financials, industrials, consumer discretionary and consumer staples taking a double-digit allocation (read: Make the Ultimate Consumer Bet with the Gaming ETF).
Country weights for the top three are France (31.63%), Germany (30.06%) and Spain (10.04%). EZU is a large cap centric fund and is extremely liquid, trading in volumes of 2 million shares per day.
The fund is up 5.44% this year and currently has a Zacks ETF Rank of #3 or ‘Hold’
WisdomTree Euro Debt Fund (EU - ETF report)
Launched in May 2008, this ETF provides broad exposure to debt securities of issuers in the Euro zone. It seeks a high level of returns in the form of both income and capital appreciation.
Holding 34 securities, about 50% of the product’s holdings mature in less than 10 years, giving EU an effective duration of 5.25 years and average maturity of 5.30 years. In terms of credit quality, the fund focuses on top rated ‘AAA’ bonds.
Again here, Germany and France occupy the top two positions in terms of country exposure, closely followed by Luxumberg and the Netherlands.
The product has so far attracted assets worth just $4.5 million, charging investors a fee of 35 bps a year. It yields 1.57% in annual dividends, 0.46% in 30-day SEC yield and 0.86% in yield to maturity. The ETF has lost 3.85% year-to-date.
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