Back to top

Time to Get on the German ETF Bandwagon?

Read MoreHide Full Article

Economic conditions in the euro zone remain uncertain as the bloc is experiencing a long recession streak, which was aggravated by harsh winter conditions in the first quarter. Initially, the trouble was limited to Portugal, Greece and Spain, but now it is spilling over to other regions, including France, as well.

However, Germany, the largest economy in the region and the heart of the euro zone, has well endured the recent pullback in European markets. The nation is arguably the strongest performer and one of the key leaders in the ongoing the euro zone crisis (read: Avoid These 3 Eurozone ETFs This Summer).

Bright Spot in Europe?

Germany has a stable labor market, high level of employment with wage increases, moderate inflation and a low government deficit, suggesting that the country is still on a relatively solid footing compared to the other Euro zone members.

The economy narrowly escaped recession and returned to a mere growth of 0.1% in the first quarter after contracting 0.6% in the fourth quarter last year. The improvement was driven by strong household spending and a low unemployment rate.

The unemployment rate was close to its lowest level at 6.8% in May, below 7.1% in April. Debt remained stable at 81.9% of GDP in 2012. The nation still possesses an ‘AAA’ credit rating from all the three rating agencies – Standard & Poor, and Fitch and Moody’s – for the long term.

Despite the worries in the Euro zone, many expect the German economy to rebound speedily in the second half of the year as construction activity picks up and exports gain momentum (read: Can This High Yielding European ETF Surge Higher?).

Further, the country’s well-equipped infrastructure, lower business costs, fair labor laws, efficient transport system, central location and large market size make it a safe bet for investors seeking exposure to the Euro zone without too many risks.  

Euro Zone Crisis: Bigger Concern

While long-term prospects are encouraging, a deep recession in Euro zone is holding back German growth. The Bundesbank has reduced the economic growth forecast from 0.4% to 0.3% for the year and from 1.9% to 1.5% for the next. In addition, the IMF also cut its 2013 outlook to 0.3% from 0.6% earlier this month.

These below half percent mark projections suggest that Germany is far from growth of 3.0% and 4.2%, seen in 2011 and 2010, respectively. Also, the country could be extremely close to falling back into a recession this year (read: Are German ETFs in Trouble?).

EWG in Focus

That said, the most popular and oldest German ETF on the market has seen huge popularity and fund inflows of late. The iShares MSCI Germany ETF (EWG - Free Report) has attracted over $1.2 billion since May, propelling its total asset base to around $4 billion. Volume is quite high on the ETF while bid/ask spreads are tight, suggesting total costs should be right around the 0.50% mark.

The fund tracks the MSCI Germany Index, holding 53 securities in the basket. The portfolio consists primarily of large cap stocks, with a focus on consumer discretionary, financials, materials, health care and industrials. Assets are relatively well spread out with Bayer, BASF and Siemens taking the top three spots and making up at least 8% of total assets.

In terms of performance, the fund was least impacted by the downturn in the Euro zone. EWG continues to perform remarkably well and is barely holding onto a gain in the year-to-date timeframe and 27.9% in the trailing one-year period (read: 3 European ETFs Holding Their Ground).

With these returns, the German ETF is leading the broader European funds significantly. The product has outperformed the most popular Vanguard FTSE Europe ETF (VGK - Free Report) , iShares MSCI EMU Index Fund (EZU - Free Report) by wide margins. 

Bottom Line

Just remember that the overall outlook for Germany is still quite positive even as we are well into summer and near the end of the second quarter. Given the strong fundamentals, the German economy is expected to improve again as other Euro zone economies bottom out and the world economy gains momentum (see more ETFs in the Zacks ETF Center).

In the long run, we are currently maintaining our Zacks ETF Rank of 3 or ‘Hold’ on EWG. This suggests that we are waiting to see more positive momentum in the economy, though signs are certainly encouraging, especially when compared to other markets in the region.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

ISHARS-GERMANY (EWG) - free report >>

ISHARS-EMU IDX (EZU) - free report >>

VANGD-FTSE EUR (VGK) - free report >>

More from Zacks ETF News And Commentary

You May Like