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Europe appears to be turning around with modest growth expected in the second half of the year. This is particularly due to calm trading regarding the region's debt woes, as well as hopes over the area emerging out of recession.

While the U.K. and Germany are leading the way for the European recovery, much-troubled Greece is also showing some hope (read: Time to Get on the German ETF Bandwagon?).

Growth in Greece contracted more than 23% since the recession and is now expected to see contraction of just 4.3% in 2013 and modest growth in 2014. It appears that optimism in the euro zone along with a strong tourism season will finally result in the improvement of the country’s GDP.

Notably, the Greek economy shrank 4.6% in the second quarter, less than the 5% forecast and much below the 5.6% decline in the first quarter. This represents a gradual deceleration of the country’s longest recession.

The country is expected to return to positive territory next year as it continuously strives to fix its public finances. The debt restructuring program by the government led to a huge reduction in interest cost on debt. Moreover, the nation expects to see a budget surplus by the end of the year.

In fact, Greece has reported a budget surplus of €2.6 billion ($3.5 billion) in the first seven months of the year against a deficit of €3.1 billion in the year-ago period. Further, with production level becoming stable, it can be said that the country may soon bottom out (read: 3 European ETFs Holding Their Ground).

Greece ETF in Focus

With Greece on the verge of recovery, it appears that investors are becoming optimistic about the country. In fact, the ETF tracking the nation, Global X FTSE Greece 20 ETF (GREK - Free Report) , which turned out to be among the worst performers in 2012 and the first half of 2013, is seemingly gaining traction.

The ETF has gained about 24% in the past four weeks, indicating a huge reversal in the trend from the first half of 2013, which was deep in red. The product has clearly outpaced the broader American and European funds by wide margins in the same period, suggesting that a strong positive shift in momentum regarding Greece is at hand (read: Inside the Greece ETF).

This remarkable performance has been brought up by its holdings breakdown, which is heavily skewed towards financial securities. The positive development in banks is benefiting the ETF as financials occupy the top position in the fund with 22% share.

GREK, which manages an asset base of $58.1 million, tracks the FTSE/ATHEX Custom Capped Index and is home to a small basket of 22 companies. The ETF has heavy exposure to the top three firms – Coca Cola HBC ADR, Hellenic Telecom and Piraeus Bank SA – that collectively make up for 29% of total assets. The fund charges a fee of 65 basis points on an annual basis.

Long Term Still Gloomy

While the short term looks promising, high unemployment and bailout targets pose biggest risks to the nation’s long-term growth story. In fact, the country has the worst unemployment rate in the whole of euro zone. The rate stands abnormally high at 27.6% in May, up from 27% in April (read: 5 ETFs for Countries with Highest Employment Rates). 

While recession in the country has eased slightly, it is not enough to boost tax revenues to meet the bailout targets. Gross tax revenue lagged targets by about €1.5 billion ($2.14 billion) in the first seven months of the year.

As such, Greece would need further financial aid next year from the European Union to meet its current bailout objectives, according to the latest data from the International Monetary Fund (IMF). This is the biggest question mark regarding the economy in 2014 and beyond.

Bottom Line

To sum up, although the Greek economy is showing some signs of stability it has a long way to go. Investors should note that the overall outlook for Greece is still quite negative and that some more pain could be in store for this nation.

We currently have a Zacks ETF Rank of 4 or ‘Sell’ rating on GREK (see more in the Zacks ETF Center). This suggests that the longer-term picture is still very weak for this fund, and that investors should not be fooled by this recent surge. Investors should look at other markets in Europe—or at least broader funds—for exposure, rather than taking risk on an unlikely rally continuing in Greek shares.

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