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Is Europe Swinging toward the Right? ETFs in Focus

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Italy went to polls on Mar 4 to choose its next leader. After a long day’s voting, exit polls predict a hung parliament, pushing Italy into weeks of political uncertainty, as parties open negotiations to form a majority.

With counting yet to be completed, polls suggest that anti-immigration establishments are gathering steam in Italian politics. Multiple analysts believe that results would be inconclusive and will initiate a period of intense negotiations between major parties to form a government by the end of March.

Fate of the Far-Right

Far right politics seems to be gathering steam in Europe. Despite Geert Wilders of Netherlands and Marine Le Pen of France failing to emerge victorious in their respective elections, the support they received shows that Europeans are divided when it comes to political orientation in their respective countries.

Moreover, in the German elections, anti-immigration Alternative for Germany (AfD) secured 12.6% votes as Germans opposed Merkel’s refugee-friendly policy and her handling of the 2015 migrant crisis. In the Austrian elections, center-right leader Sebastian Kurz secured victory in late 2017.

Italy’s anti-establishment Five Star Movement is predicted to have gained the maximum number of votes by an individual party, while a center-right coalition is anticipated to lead the Senate. Per a poll by national broadcaster Rai State TV, Five Star Movement led by 31-year-old Luigi di Maio is expected to secure between 29.5% and 32.5% of the votes, a lot below the 40% needed to form a government.

Former Prime Minister Silvio Berlusconi’s centre-right Forza Italia and the far-right the League (La Lega) each were polling between 12.5% and 15.5%. They are running as part of a centre-right coalition along with far-right Brothers of Italy, which together is projected to secure between 33% and 36% votes, still short of the percentage required to secure a majority. However, Berlusconi is currently not eligible to become Prime Minister, since he has been convicted of a tax fraud.

The ruling centre-left Democratic Party (PD), led by former Prime Minister Matteo Renzi had a bad evening, as it is set to win votes between 20% and 23%, per the exit poll. The centre-left coalition is projected to gain votes between 25% and 28%. “If this is the result, for us it is a defeat and we will move into the opposition,” said Ettore Rosato, leader of the lower chamber of parliament for PD, per an Independent article, citing a report by Italian media.

What’s in Store for Europe?

One of the primary issues in Italy’s elections has been the surge in undocumented immigrants entering the nation. As a result, if the projections turn out to be accurate, it could imply that Italy might face months of political uncertainty, having broader implications of pro-Europe leaders. Following the polls, French anti-immigration leader Marine Le Pen took to twitter to say, "The European Union is going to have a horrible evening." Final results are expected at 2 p.m. local time (8 a.m. ET).

Both the Five Star Movement and the League are anti-immigration parties. Italy is the third-largest country in the 19-member Euro bloc and thus drives economic sentiment in the region to a great extent. As a result, if the centre-right does indeed end up taking control of the government, its harsh stance toward the European Union (EU) will make it difficult for Germany’s Merkel to work alongside France’s Emmanuel Macron to secure further integration in the euro region (read: ETFs to Buy As German Economy Grows).

Let us now discuss a few ETFs focused on providing exposure to Austrian equities (see all European equity ETFs here).

iShares MSCI Italy ETF (EWI - Free Report)

This fund seeks to provide exposure to a broad range of equities in Italy.

The fund manages AUM of $696.4 million and charges 49 basis points in fees per year. Financials, Energy and Utilities are the top three sectors of the fund, with 36.6%, 16.5% and 14.5% allocation, respectively (as of Mar 1, 2018). From an individual holdings perspective, the fund has high exposure to Intesa Sanpaolo, Enel and Unicredit, with 12.4%, 11.6% and 10.3% allocation, respectively (as of Mar 1, 2018). It has returned 34.4% in a year. EWI has a Zacks ETF Rank #3 (Hold), with a Medium risk outlook.

Let us now compare the performance of this ETF to a broader Europe based ETF, FEUZ.

First Trust Eurozone AlphaDEX Fund FEUZ

This fund seeks to provide exposure to equities in the Eurozone.

The fund manages AUM of $68.0 million and charges 80 basis points in fees per year. From a geographical perspective, the fund has high allocation to Germany, France and Italy, with 25.8%, 24.6% and 12.7% exposure, respectively (as of Mar 2, 2018). Industrials, Consumer Discretionary and Financials are the top three sectors of the fund, with 18.7%, 17.3% and 13.6% allocation, respectively (as of Mar 2, 2018). From an individual holdings perspective, the fund has high exposure to Neste Oyj, Umicore S.A. and ArcelorMittal, with 1.4% allocation each (as of Mar 2, 2018). It has returned 30.3% in a year. FEUZ has a Zacks ETF Rank #3, with a Medium risk outlook.

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