Euro zone economies have been faltering on deflationary threats and weak growth related issues for quite some time. The launch of a €1.14 trillion ($1.16 trillion) bond-buying program in March hasn’t been able to hold back its economies from wavering year to date. Though the region managed two-year high economic growth in Q1, the momentum fizzled out in Q2. France and Italy – accounting for 40% of the currency bloc’s growth – were the main laggards (read: Revisiting Eurozone ETFs As Economic Growth Falters).
Despite the soft backdrop, the German economy, the lifeblood of Euro zone, has been treading water. In fact, defying the trend of the Euro bloc, German GDP grew 0.4% in Q2, up from 0.3% in Q1. As per analysts, encouraging vibes emanated mainly out of exports. Since Germany is an export powerhouse, a solid export expansion of 2.2% (q/q) in Q2 that resulted in considerable trade surplus was able to save the economy. Otherwise, domestic consumption was a little soft in the economy.
Now if the German economy is battered by an export issue, everyone can imagine how perilous the impact would be. Something of this sort happened to Germany this week which spread shockwaves in almost the entire European market (read: Is Europe ETFs Rally Over?).
Behind the Crash
The ills were induced by the iconic German carmaker Volkswagen AG (VLKAY) which was accused of tricking on the Environmental Protection Agency (EPA) test. Per EPA, Volkswagen had set up a software algorithm which allowed it to mislead U.S emissions tests and the carmaker has admitted the charge.
This huge blame on the iconic carmaker led its stock to lose over 30% in the first two days of this week and could end up in an up to $18 billion fine for the company, per EPA. According to the EPA, Volkswagen vehicles emit nitrogen oxides, at almost 40 times the standard amount which could pose risks to public health.
The U.S. is an important market for Volkswagen, and this outrage may impede Volkswagen’s sales in the country, thus putting Germany’s all-important export sector at risk. Also, the probe can be widened to other German automakers if there is any discrepancy in the results.
This immediately weighed on the key auto industry of Germany. Moreover, Volkswagen is in collaboration with Daimler AG, which has exposure in several leading Germany ETFs, to manufacture the Crafter delivery van.
If this was not enough, the nerve-wracking economic concerns in China where manufacturing data for September plunged to a six-and-half year low also posed threats to German exports. Notably, China was the fourth-biggest export market for Germany in 2014 – and made up for 6.6% of total exports and 2.6% of Germany’s GDP. All these business threats soured investors’ mood toward German investing.
The Volkswagen scandal wrecked havoc on the key German stock index DAX with over 7% lost in the last five trading sessions (as of September 22, 2015). The key European benchmark Stoxx Europe 50 lost over 5% during the same timeframe.
We have highlighted three Europe ETFs below that hit a new 52-week low on September 22, 2015 on Volkswagen issue (see all European Equity ETFs here).
iShares MSCI Germany ETF (EWG - Free Report)
The fund tracks the MSCI Germany Index, managing an asset base of $6.46 billion and has a daily average trading volume of more than 7 million shares. The fund holds a basket of 54 stocks charging 48 basis points as fees.
EWG spreads its assets well across sectors with double-digit exposure to consumer discretionary, financials, health care, materials and industrials. The fund lost 6.9% in the last five days (as of September 22, 2015) and hit its 52-week low of $24.42 yesterday. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Other Germany ETFs that were hit hard on this car scandal and registered a steep retreat, are Recon Capital DAX Germany ETF (DAX), Germany AlphaDEX Fund (FGM) and db X-trackers MSCI Germany Hedged Equity Fund (DBGR). DAX, FGM, QDEU and DBGR were down 7.9%, 8% and 5.7%.
SPDR EURO STOXX 50 ETF (FEZ)
This fund follows the EURO STOXX 50 Index, which measures the performance of some of the largest companies across the components of the 20 EURO STOXX Supersector Indexes. The fund appears rich with AUM of nearly $4.2 billion, and average daily volume of about 3 million shares. Expense ratio comes in at 0.29%. Holding 54 securities in its basket, the product is moderately spread out across components with no firm making up for more than 5.2% of total assets.
Financials is the fund’s top sector with over 26% exposure followed by Health Care and Industrials. Germany gets 30.8% focus in it. FEZ lost over 5% in the last five trading sessions and hit its 52-week low of $33.31 yesterday. FEZ has a Zacks ETF Rank #3 with a Medium risk outlook.
iShares MSCI EMU Index Fund (EZU)
This $10.4 billion-product provides exposure to the EMU member countries (those European Union members that use the Euro as currency). EZU charges investors 0.48% in annual fees. The fund holds about 244 securities in its basket with none holding more than 3.18% share.
The product has a definite tilt toward financials at 23.65%, followed by consumer discretionary (14.6%) and industrials (13.1%). Germany takes the largest share in the basket with 30% focus. The fund lost 4.7% in the last five trading sessions and hit its 52-week low of $33.90 yesterday.
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