European banks will be facing a tough stress test this year to
prove their endurance in the bond, property and stock market
downturn as well as currency crisis in Central and Eastern Europe.
Under this test, 124 banks from the 28-country European Union (EU)
have to illustrate their capital strength to counter various
Stress Test in Focus
According to the European Banking Authority (EBA), banks across 28
European nations have to maintain a common Tier 1 capital of at
least 5.5% of their risk-weighted assets in order to clear the
stress test given the adverse scenario over the three-year period
from January 2014 (read:
Top European ETF to Play the Portugal Bailout
The scenario assumes that the EU economy would slip into a two-year
recession shrinking 0.7% this year, 1.5% in the next and barely
show grow in 2016. Unemployment across the EU would hit a record
13% in 2016; consumer prices will not rise leading to potential
deflation; and home, commercial real-estate and stock prices would
drop 21.2%, 14.7% and 19.2% over three years, respectively.
Additionally, currencies in Eastern European countries such as
Poland and Hungary would devalue steeply and interest rates on
government and corporate bonds would rise. Apart from these, banks
also have to emerge stronger in the global crisis (read:
Where Will Global Currency ETFs Go in 2014?
The worst-case scenario also predicts that the growth rate in
developed economies like U.S. and Japan will shrink by a cumulative
5-6% and fragile emerging nations like China and Russia
collectively will plummet 10% over the next three years.
ETFs to Watch
The stress test, which would begin at the end of May, would restore
confidence in the banking sector and the broad financial industry,
which is the major driver of the economic growth, and prevent
taxpayer bailouts. Results will likely be announced by the end of
Given this, investors should keep a close eye on the following ETFs
and in cash in on the opportunity whenever arises:
iShares MSCI Europe Financials ETF (
This fund provides exposure to the financial segment of the
developed European market by tracking the MSCI Europe Financials
Index. It holds 103 securities in its basket with the top two firms
- HSBC Holdings and San Banco Santander - taking the largest share
at 9.36% and 5.61%, respectively. Other firms do not hold more than
3.84% of assets.
Further, more than half of the portfolio is dominated by banks
while insurance and diversified financials make up for a combined
42.6% share. In terms of country exposure, United Kingdom takes the
top spot at 30.35% while France, Spain, Switzerland and Germany
round off the top five with double-digit allocation (read:
Time to Bet on the British ETF?
EUFN has amassed $507.2 million in its asset base and trades in
good volume of nearly 201,000 shares per day. The product charges
48 bps in fees a year and has added nearly 3% so far this year. The
fund currently has a Zacks ETF Rank of 2 or 'Buy' rating with High
SPDR S&P International Financial Sector ETF (
This ETF follows the S&P Developed Ex-U.S. BMI Financials
Sector Index, holding 135 non-U.S. financial securities of
developed countries. The fund is unpopular and illiquid with AUM of
$12.4 million and average trading volume of nearly 5,000 shares.
Expense ratio came in at 0.50% (see:
all the Financial ETFs here
The fund has a slight tilt toward the top firm - HSBC Holdings -
which make up for 4.42% share in the basket. Other securities hold
less than 2.8% of total assets. European firms dominate the fund's
return with more than half of the assets, followed by Asia Pacific
(35%), North America (13%) and Asia (1%).
In terms of industrial exposure, banks make up for more than half
of the portfolio while insurance takes one-fifth share. The fund
also has 13% exposure to real estate sector. The ETF is down 2.12%
in the year-to-date time frame.
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ISHARS-MS EU FN (EUFN): ETF Research Reports
SPDR-SP I FINL (IPF): ETF Research Reports
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