Although Europe started 2012 with a bit of weakness, the
troubled region managed to find its footing and finish the year
on a relatively solid note. In fact, some are saying that the
worst of the European crisis is behind us, and that the economies
on the continent can finally begin to march back higher.
This will of course need to be done with a large push from
Germany as the country is the largest economy in the region and
the heart of the euro zone. The nation is also seen by many as
one of the stronger economies and one of the key leaders during
the euro zone crisis (read
Do Country ETFs Really Provide
Diversification?
).
Due in part to this, the recent German GDP report appears
especially troubling. That is because the report showed that
total GDP for the country
declined by 0.5%
in the final quarter, marking the worst performance since the
global crisis began in 2008-2009.
The GDP decline also helped to push the year growth level down
to 0.7%, a far cry from the previous two years which saw growth
of 3.0% and 4.2%, respectively, for 2011 and 2010. Things aren't
looking much better for 2013 either, as growth projections are
looking to come in around the half percent mark, suggesting that
Germany could be perilously close to falling back into a
recession.
If that wasn't enough, the euro currency has also been quite
strong, a situation that could further hurt the German market.
That is because Germany is one of the biggest exporters in the
world and a strong currency makes their exports less competitive
on the global stage, a situation that, if it continues, could
also negatively impact the German market heading further into
2013 (see
3 Developed Market ETFs Crushing American
Stocks
).
Still, even with these broad negatives, it isn't all bad
news for the country, as many of its weaker neighbors appear to
have bottomed out, at least for now. Germany also still has
a
strong housing market, high levels of employment
, and wage increases, suggesting that the country is still on a
relatively solid footing.
Investors should also note that broad German
ETFs
have outperformed their American counterparts over the trailing
one year period by a relatively wide margin. However, in the
year-to-date time frame, the S&P 500 has taken the leadership
role between the two and if this trend continues it could be more
bad news for those focused on Europe in the short-term.
For investors concerned about this economic stalwart and what
it means for the broader global economy, it could be worth it to
keep an eye on the following German ETFs in the months ahead to
see if they can get through this soft patch, or if they will
continue to outperform their American cousins over the
long-haul:
iShares MSCI Germany ETF (
EWG
)
This is easily the most popular and oldest German ETF on the
market having amassed over $4 billion in AUM with a debut in
1996. Volume is quite high on the ETF while bid ask spreads are
tight, suggesting total costs should be right around the 0.51%
mark (see
Three European ETFs with Incredible 2012
Gains
).
The portfolio consists primarily of large cap stocks, with a
focus on consumer discretionary, financials, materials,
industrials, and health care. Assets are relatively well spread
out with Siemens, BASF and Bayer taking the top three spots with
all making up at least 8% of total assets.
Market Vectors Germany Small Cap ETF (
GERJ
)
This ETF hasn't really caught on with investors, despite
offering up a completely different exposure profile than EWG in
one of the world's most important economies. Volume is quite
light, net assets are below $10 million, and expenses are just 55
basis points a year.
The ETF has been more volatile than its large cap cousin, but
in bull markets it usually outperforms thanks to its pint-sized
nature. Top sectors include industrials, financials, and consumer
discretionary, while in total the ETF has 83 securities in its
basket.
First Trust Germany AlphaDEX Fund (
FGM
)
For a more quantitative approach, investors have this product
from First Trust which looks to zero in on the best German
stocks-and avoid the worst-by using the AlphaDEX methodology.
This approach does reduce the total number of holdings to 40
though, while it makes the expense ratio a high 80 basis points a
year (read
Beyond Germany: Three European ETFs Tracking
Strong Countries
).
The portfolio is extremely spread out though, with no one
security accounting for more than 5% of assets, so company
specific risk isn't much of an issue. Meanwhile, from a sector
look, consumer discretionary accounts for about 30% of assets,
trailed by 22% in materials for this German focused First Trust
fund.
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Long EWG
ISHARS-GERMANY (EWG): ETF Research Reports
FT-GERMANY (FGM): ETF Research Reports
MKT-VEC GER SC (GERJ): ETF Research Reports
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