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2014 World Cup Semi-Finals: ETF Edition

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We are now nearing the final results of the 2014 FIFA World Cup. The event kicked off on June 12 with the climax slated for July 13. Thanks to its wide global involvement, the event has stepped beyond the gaming arena and peeked into the investing world.

So far, speculation has been rife on whether Brazil – the host nation – can get any boost from this event (read: Can FIFA World Cup Give Brazil ETFs a Kick?) or who will win the championship and monetize the credit in the equity market.

The latest comment from Goldman Sachs, as reported by Bloomberg, was more supportive.  Goldman stated that the winning country's stock market beats global markets by an average of 3.5% in the month that follows.  But the report also states a 4% decline in next the 12 months for these same stocks, indicating that the boom is temporary.

Whatever the case, such an interesting remark, and the wide number of country-specific exchange-traded products in the market, inspires us to play a mock World Cup semi-final using country ETFs as proxies. There is a high chance that the real tournament will present us with a different champion, but landing up on a country ETF winner on the basis of its potential and past performance is an interesting idea (read: Who Wins the 2014 World Cup of ETFs?).

Semi Finals

By now the world has witnessed winners and losers in the group stage, round of 16 and quarter finals. The final four teams are set to play semi finals on July 8 and 9. Brazil and Germany are slated to fight the July 8 battle while Argentina and Netherlands will have a face-off the following day.

Semi Final – 1

iShares MSCI Brazil Capped ETF (EWZ) vs. iShares MSCI Germany ETF (EWG)

EWZ – The most popular Latin-American ETF has been saddled with slowing growth, sky-high inflation, dysfunctional economic policies and fear of a cease in cheap dollar inflows in the wake of Fed QE taper for long.

Though some opinion polls indicated that president Dilma Rousseff will not be elected again this year, giving the much-needed boost to the ETF, the basic fundamentals of the economy remains weak (read: Forget the World Cup: The Real Reason Brazil ETFs Are in Focus).

As a result, EWZ carries a Zacks ETF Rank #5 (Strong Sell). EWZ gained 19.28% in the past one year.

EWG – EWG is the largest and most popular ETF tracking the German equity market. Though Euro Zone revisited the growth path last year, deflationary worries resurfaced this year.  Amid such tensions, only the German economy lived up to investor expectation in Q1, while Euro Zone’s second and third largest economies – France and Italy – froze unexpectedly.

EWG has a Zacks ETF Rank #2 (Buy). EWG returned investors 34.02% in the past one year.

Verdict: Germany and EWG easily beats its Latin American counterpart thanks to better rank, return and economic efficacy.

Semi Final – 2

Global X FTSE Argentina 20 ETF (ARGT) vs. iShares MSCI Netherlands ETF (EWN)

ARGT: This Latin American ETF has chances of turning out a laggard. The nation has been crippled by political and economic woes. The recent debt default worries have also come across as another negative for the nation as well as the related ETF. ARGT currently has a Zacks ETF Rank of 5 but surprisingly surged 40.63% in the past one year (read: 3 Latin America ETFs Doing the Samba This World Cup).

EWN: The main way to play the Netherlands in ETF form is via EWN. Though the nation’s GDP shrank 0.60% sequentially in Q1, it advanced in the last two quarters of 2013. Investors should note that the country’s unemployment rate is much lower than the EU average. EWN has a Zacks ETF Rank of 2 and was up 19.28% in the last one year (read: Top Ranked Dutch ETF Unscathed by S&P Downgrade).

Verdict: Though ARGT delivered a stupendous return among the final four, EWN wins over ARGT armed by a better rank, brighter economic potential and fair valuation. After such a steep run-up without any basic economic support, the Argentina ETF might falter in the coming days, and especially so if the country defaults on its debt payments.

Grand Finale

Our ranking system suggests that Germany and the Netherlands will make it to the final. Both the European ETFs have a Buy rating with a Medium risk outlook. Notably, return-wise, EWG outperformed EWN in the last one-year, six-month and three-month periods.

Since the last FIFA World Cup in 2010, EWG gained 57.55% while EWN added 38.41%. Economic-indicator wise, Germany shines more than Netherlands at the current level. So, EWG wins the title, leaving the Netherlands just short once again.

Bottom Line

While we have crowned EWG as the winner, investors should note that this fun game was purely based on financial details and it had nothing to do with soccer. Still, for investors interested in pouring their money into the international arena, the top-rated and relatively-stable Euro Zone ETF – EWG could make for an interesting choice, no matter what happens in the rest of the World Cup.

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