After posting the best year of growth since 2007, Europe is caught in a double whammy of politics and geopolitics. This is especially true given the deepening political crisis in Italy and new political drama brewing up in Spain. Additionally, Trump’s protectionist trade action, which is likely to have an impact on global economic growth, is making investors’ jittery.
Inside Politics Gyrations
The political risk in Italy has escalated given that an effort to form the first populist government in Western Europe has collapsed after president Sergio Mattarella rejected the choice of a euro-skeptic as finance minister, which could provoke "Italy's exiting of the euro”. The leader of the two parties — anti-establishment Five Star Movement and the far-right League — were in talks to form a coalition for weeks. Italy’s FTSE MIB index dropped 2.1% on May 28 after tumbling 4.5% last week (read: Negative News Flow Puts Eurozone ETFs in Focus).
The latest development in the euro-zone’s third-largest economy has triggered a possible constitutional crisis as Italy has been without a government since Mar 4. It has raised the likelihood of another election this year, raising the concerns over the Italian membership of the currency bloc and the country's role in the European Union. The longer-than-expected crisis could also lead to fears of a euro-zone meltdown.
Meanwhile, more political risk seems to be in the cards with the heightened risk of a snap election in Spain. The biggest opposition party in Spain, the Socialists, called a vote of confidence against prime minister Mariano Rajoy in response to a corruption case engulfing the ruling Popular Party that led to a bloodbath in Spanish stocks. Notably, Spain’s IBEX 35 index declined 1.7% on May 25 and another 2.3% on May 28.
Coming to geopolitics, the Trump administration might not extend the exemption for the European Union on steel and aluminum tariffs after Jun 1. The White House had proposed to cut European Union steel and aluminum exports to the United States by about 10%.
ETFs in Focus
All these factors have dulled the appeal for European equities and related ETFs at least for the near term. While several ETFs have seen rough trading, we have presented the ones that are likely to be impacted the most by the recent events.
iShares MSCI Spain ETF (EWP - Free Report)
The fund targets the Spanish stock market by tracking the MSCI Spain 25/50 Index and charging investors 49 bps in annual fees. It holds 23 stocks in its basket with heavy concentration on the top firm at 19.4% while other firms make up for single-digit exposure. Financials takes the top spot at 41.7% in terms of sector holdings, followed by utilities (15.6%), and industrials (14.3%). The product has accumulated $1 billion in its asset base and trades in a solid average daily volume of around 941,000 shares. It has lost 5.4% in a month and carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see: all the Europe Equity ETFs here).
iShares MSCI Italy ETF (EWI - Free Report)
With AUM of $557.8 million, the fund offers exposure to a broad range of companies in Italy by tracking the MSCI Italy 25/50 Index and holding 24 stocks in its basket. It is heavily concentrated on the top four firms with a combined 42.8% share while other securities hold less than 5% of total assets. Further, about 33.2% of the fund’s portfolio is allotted to financials while energy, utilities, consumer discretionary and industrials round off the top five with a double-digit exposure each. The fund trades in heavy volume of more than 1.1 million shares a day on average and charges 49 bps in annual fees. It has shed about 9.2% in a month and carries a Zacks ETF Rank #3 with a Medium risk outlook.
iShares MSCI Europe Financials ETF (EUFN - Free Report)
This fund provides exposure to the financial segment of the developed European market by tracking the MSCI Europe Financials Index. It holds 83 securities in its basket with banking firms accounting for a major 53.4% of the portfolio. Insurance and diversified financials round off the next two spots. In terms of country exposure, United Kingdom takes the top spot at 30.4% while Switzerland, France, Germany, Spain and Italy round off the next spots. EUFN has amassed $2 billion in its asset base and charges 48 bps in fees a year. Volume is heavy, exchanging nearly 1.7 million shares in hand per day on average. EUFN has lost 5.6% in one month and has a Zacks ETF Rank #3 with a Medium risk outlook.
First Trust Eurozone AlphaDEX ETF (FEUZ - Free Report)
This fund follows the Nasdaq AlphaDEX Eurozone Index, which uses AlphaDEX stock selection methodology to select stocks from the NASDAQ Eurozone Index. The fund has AUM of $79.6 million and charges 0.80% in expense ratio. Holding 151 securities in its basket, the product is well spread across components with none accounting for more than 1.5% of assets. Consumer discretionary, materials, industrials, financials and real estate are the top five sectors. In terms of country allocation, France and Germany are leading with 26.1% and 24.6% share, respectively, followed by Italy (11.4) and Spain (8.5%). The fund is down 3.3% in one month and trades in average daily volume of nearly 17,000 shares. It has a Zacks ETF Rank #3 with a Medium risk outlook.
PowerShares CurrencyShares Euro Trust (FXE - Free Report)
The ETF seeks to track the price of the euro relative to the U.S. dollar. The value of the fund increases when the euro strengthens and declines when the dollar appreciates. It has amassed $315.3 million in its asset base and charges 40 bps in fees and expenses. FXE trades in average daily volume of 355,000 shares and has lost 4% over the past month. It has a Zacks ETF Rank #3 with a Medium risk outlook (read: Currency Hedged ETFs Gaining Love on Rising Dollar).
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