The Eurozone problems are not new by any stretch of the word.
Investors have been anticipating a full fledged economic
recession since early 2011, before the problems reached alarming
levels during the latter half of previous fiscal.
The impact of this was felt throughout the world, both in
emerging as well as developed nations, in the form of
deceleration in overall economic growth and investor risk
aversion leading to extreme stock market volatility and decreased
Thankfully, some nations like Germany and France have been
extremely resilient on the brink of an economic downturn in the
distressed continent and have primarily saved the block from
falling apart. However, this trait took a severe blow on the 19
of November as credit rating agency Moody's Investor Services,
downgraded the sovereign rating of one of the largest economies
from the Eurozone-France (see
Do Country ETFs Really Provide
The sovereign bond rating has been downgraded one notch from
Aaa to Aa1 with a negative outlook. The primary reasons that have
been cited by the agency for the downgrade are
weak long term growth outlook, deteriorating
fiscal condition and the lack of a Central Bank for monetization
of its debts if the situation demanded.
The nation has been under tremendous pressure to bail out its
counterparts, and now ironically, the fifth largest economy finds
itself on the wrong side of things. This is the second rating
downgrade for the French economy in Fiscal 2012 as rating agency
Standard & Poor's had earlier downgraded France to AA+ form
its supreme AAA rating.
So what exactly does this mean for the U.S investors who wish
to gain exposure in the slice of the market? Should they wait for
a panic correction and then enter at cheaper valuations?
Or will there be no correction at all as the scope for an
upside seems more than eminent? We seek to find these answers
with the help of the only broad based pure play on the French
iShares MSCI France ETF (
EWQ tracks the MSCI France Index, which tracks the performance
of the equity markets in France. It provides a proportionate
exposure in every sector of the economy without being
particularly biased towards any particular sector. However,
Financials (15.80%) and Industrials (15.07%) are its top two
sectors and these segments are highly correlated with the health
of the broader economy (read
3 Sector ETFs with Solid Yields
The rating downgrade is technically supposed to push borrowing
costs higher especially for banks and other institutions if of
course we see a rise in French Bond yields as well. Having said
this, it is also prudent to note that the French 10 Year Bond
Yield has risen by almost 11 basis points since the downgrade
Although it's difficult to exactly measure the impact of the
rising yield on the corporate sector, one thing that remains
certain is that it will surely hurt bigger and asset sensitive
banks squeezing net interest margins. This is the only
foreseeable disadvantage for the ETF a major portion of its asset
is allocated towards the financial sector (see more in the
Barring this, there's not much to worry about as far as the
rating downgrade is considered. Of course the economy has its own
set of problems as the corporate sector earnings have taken a
plunge on account of the rising Euro which has led to the economy
loosing its competitiveness in the global markets.
The ETF holds 74 securities in total with a concentrated
exposure in the top 10 holdings with accounts for more than half
of its total assets. The ETF was launched in March of 1996 and
has been able to amass a modest asset base of $418.61 million. It
charges investors a rather high expense ration of 52 basis points
paying out 3.21% as yields.
From a performance perspective, the ETF has had mixed bag
results just like most domestic equity
. The following table summarizes its quarterly performance in
this fiscal year.
EWQ Returns (Fiscal 2012)
Interestingly, in the 1
quarter, the ETF had performed best-the quarter in which it was
downgraded by rating agency Standard & Poor's. However
strange it might seem, but the reality nevertheless. In fact the
ETF is up by more than 13% in terms of year to date returns.
Also, defensive sectors like Consumer Discretionary (13.23%)
and Healthcare (12.61%) account for a good proportion of EWQ's
total assets. This probably is an advantage for the ETF in times
of market volatility (see
Volatility ETFs: Three Factors Investors Must
Also, from a risk analysis perspective, the ETF is relatively
less volatile than other European funds having a three year
annualized standard deviation of 32%. However, it does not
provide international diversification as it has a strong
R-Squared value of 80% against the S&P 500 Index.
EWQ is currently trading at $21.62 after the trading session
November 2012. The 14 Day Relative Strength Index (RSI) with a
is hovering around the neutral territory.
This is in alignment with out
Zacks Rank of 3 or 'Hold'
for EWQ. The RSI presently is in a recovery mode tending towards
the overbought territory suggesting some upside might be left (
read Zacks Buy Ranked Internet ETF: FDN
The short term trend is definitely a positive one for EWQ.
After a week of lackluster trading sessions on the week prior to
the rating downgrade, the ETF has suddenly gained some momentum
overtaking its 30 Day SMA line.
The breakout was characterized with an extremely strong volume
of 530,000 shares compared to a three year average daily volume
of 438,000 shares. The 30 day SMA currently stands at 21.48 while
the 200 day SMA has a value of 20.65.
Whatever might be the situation, there is no denying the fact
that France still is one of the stronger economies in the
Eurozone with a relatively healthy balance sheet than most of its
While France is still is not a complete avoid for investors at
this point of time, and it remains one of the best ways to gain
exposure in the continent, it is also true that if the situation
in the surrounding nations does not improve substantially, things
can go much worse from here, suggesting that investors should
proceed with caution when dealing with the French ETF.
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ISHARS-FRANCE (EWQ): ETF Research Reports
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