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The outlandish Volkswagen (VLKAY - Free Report) scandal has rocked the confidence of investors in German automobile stocks. On September 18, the U.S. Environmental Protection Agency (“EPA”) unfolded a diabolical act in the automobile history, revealing that the automaker has installed a software algorithm into 11 million diesel-powered vehicles across the world that could bypass U.S emission tests.
According to the EPA, Volkswagen vehicles emit nitrogen oxides at almost 40 times the standard amount. Although these cars do not pose safety risks, public health is at stake.
Among the 11 million affected Volkswagen diesel cars which are currently on the road, 2.8 million vehicles are in Germany. The German government supervisory body KBA has set October 7 as the deadline by which the automaker needs to put forward a plan for dealing with the situation.
The falsification charge led Volkswagen Chief Executive Martin Winterkorn to resign. It could eventually result in penalties of up to $18 billion, as per the EPA.  Lawyers across the U.S. have also filed more than two dozen lawsuits for defrauding consumers. The company has set aside €6.5 billion ($7.3 billion) to help cover the costs of the fallout (read: Europe ETFs That Hit 52-Week Lows on Volkswagen Scandal).
The scandal has tarnished the reputation of the world’s biggest automaker to such an extent that S&P Dow Jones Indices and RobecoSAM have decided to cast off the Volkswagen stock from the Dow Jones Sustainability indexes, which track companies based on economic, environmental and social criteria. The stock will be removed after the closing session on October 5 from the DJSI World, DJSI Europe and all other related indexes.
The major concern is that the scandal has shattered the faith of regulators in German automakers and this will have a far reaching effect on the iconic German automobile industry. The European Federation for Transport and Environment suspects that along with Volkswagen other German automakers also use software in diesel vehicles that can rig emission test results.
Per the European Federation for Transport and Environment, emission testing data from the International Council on Clean Transportation brought out marked discrepancies between laboratory and real-world conditions in vehicles manufactured by automakers such as BMW AG (BAMXF - Free Report) , Daimler’s (DDAIF - Free Report) Mercedes-Benz and General Motors’ (GM - Free Report) Opel unit. The European environmental group believes that these discrepancies suggest that the automakers might be using a software that could trick emission testing.
ETFs in Focus
Given the controversies and allegations, we highlight three Germany-focused ETFs, which are highly exposed to German automobile stocks (see all European Equity ETFs here). These ETFs are extremely susceptible to the backlash of the Volkswagen scandal on the German automobile industry (read: Surprise Loser and Gainer from VW Scandal: Metal ETFs).
iShares MSCI Germany (EWG - Free Report)
The fund tracks the MSCI Germany Index, managing an asset base of $6.2 billion and has a daily average trading volume of more than 6 million shares. The fund holds a basket of 54 stocks charging 48 basis points as fees. The fund is highly exposed to automobile stocks such as Daimler (third position with 6.76% share), BMW (2.79%), Continental AG (CTTAY - Free Report) (2.15%), and Porsche Automobil Holding and Volkswagen, each with less than 1% share. The fund has lost 3.2% in the last five days and has a Zacks ETF Rank #3 (hold) with a Medium risk outlook (read: Germany ETF (EWG - Free Report) Hits New 52-Week Low).
WisdomTree Germany Hedged Equity ETF (DXGE - Free Report)
The ETF follows the WisdomTree Germany Hedged Equity Index and has roughly $310 million in AUM. This fund trades in a volume of more than 245,000 shares and charges 48 bps in fees per year from investors. In total, the fund holds about 78 securities in its basket with exposure to automobile stocks such as Daimler (5.14%), BMW (4.97%), Volkswagen (2.66%) and Continental (2.11%). The fund has lost 1.8% in the last five days but has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
Deutsche X-trackers MSCI Germany Hdgd Eq (DBGR - Free Report)
This fund manages about $157 million in its asset base and holds a basket of 54 large and mid cap German stocks by tracking the MSCI Germany U.S. Dollar Hedged Index. The ETF has 0.45% in expense ratio while volume is roughly 166,000 shares. The fund is exposed to automobile stocks including Daimler (6.78%), BMW (2.8%), Continental (2.16%), and Porsche and Volkswagen, each with less than 1% share. DBGR is down 3.1% in the past five days but has a Zacks ETF Rank #2 with a Medium risk outlook.
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