The outlook for the euro zone looks volatile with the
political gridlock in Italy and the rising euro hurting
competitiveness. The situation has worsened with fiscal
tightening and increasing unemployment restricting domestic
consumption in the region (read:
Italy ETF Plunges on Election Chaos
Spain, the fourth-largest region in the Eurozone, showed signs
of falling into a recession during the final quarter of last
year. The economy shrank by 1.3% in 2012, putting Spain's plan to
push down the budget deficit in jeopardy.
According to the International Monetary Fund (IMF), the
economy is expected to contract again this year by 1.4% on the
back of lagging business and consumer confidence. The intolerably
high unemployment rate of 26% and harsh government austerity
remain the major threats to the country's economic growth.
However, these concerns could fade with the expected pick-up
in economic activity in the second half of the year and the
recent stimulus measures to spur financing for small businesses
and reduce youth unemployment (read:
More Trouble Ahead for Italy and Spain ETFs?
). Spain is currently considering spending cuts and tax hikes
that would save €150 billion ($194 billion) by 2014.
Further, Spanish 10-year government bond yields have fallen by
about 150 bps over the past six months and are now holding steady
above the 5% mark. This is much below the 52-week high for this
benchmark and investors are somewhat relieved as a fall in these
bond yields could boost growth in the Spanish economy going
For those buying into this optimism, investors should focus on
the only pure play - the
iShares MSCI Spain Index Fund (
which tracks the MSCI Spain 25/50 Index - to target the
The product added over 13% over the trailing six months,
indicating a huge reversal in the trend from the first half of
2012, which was deep in red. This suggests the strong positive
shift in the momentum of the European outlook heading into 2013
The Key to International ETF Investing
Though the Spain ETF lost around 0.5% in the first two months
of the year, it is leading the broader European funds
significantly. The product has outperformed the most popular
iShares MSCI EMU Index Fund (
) by 210 bps, iShares MSCI Germany Index Fund (
) by 90 bps, iShares MSCI Italy Index Fund (
) by 850 bps and iShares MSCI France Index Fund (
) by 180 bps.
This remarkable performance has been brought up by its
holdings breakdown which is heavily skewed towards financial
securities. The fund has nearly 41% of the assets in the sector,
which is leading the overall market in 2013 owing to strong
performance by the banking stocks (read:
What is Driving Bank ETFs Higher?
Beyond this segment, utilities, industrials and telecom make
up for another 40% of the combined share, making semblance of
safety in the product.
Holding 24 securities, the ETF puts about 70% in the top 10
firms. This ensures heavy concentration and increases the
company-specific risks. Also, the return of the fund is highly
dependent on the returns of the top 10 firms. Banco Santander,
) and Banco Bilbao (
) occupy the top three positions in the basket.
The ETF focuses on the large cap segment that accounts for 69%
of EWP, while mid cap takes the rest with just 1% going to small
caps. In terms of style exposure, the product has a tilt towards
value stocks, ensuring more safety to investors.
Apart from fundamentals, let us take a technical look at the
chart for the Spain ETF and its trends:
From the above chart, investors should note that the ETF has
been on the rise from the second half of 2012 with certain dips
in November. This positive trend was seen again in January 2013
but could not be sustained in February. The product is highly
volatile as indicated by its annualized standard deviation of
Currently, EWP is showing weakness on the price front. The
meeting of the 9 and 50 EMA lines with the current price might
reverse this trend as the fund is already trading above its 200
EMA (see more
Additionally, the fund is trading near its resistance level of
$30. Crossing this level will show a clear strong uptrend. It has
also witnessed a bullish breakout accompanied by very high
volumes of nearly 480,000 shares per day on average. Thanks to
its extreme liquidity, investors do not have to pay an additional
cost beyond the expense ratio of 0.51%.
Given this, investors with a high risk tolerance and desire
for more income could find EWP to be an interesting play. The ETF
has been beaten down and the high yield could compensate for the
extreme volatility in the product.
Just remember that the overall outlook for Spain is still
quite negative and that some more pain could be in store for this
nation. This could be especially true if Spain's own political
issues spiral out of control, or if other problems materialize in
the debt debate.
For this reason, the longer term outlook still isn't very
positive for EWP. The country still has a host of problems and
any of its funds are likely to have significant trouble.
That is why this fund may bounce back in the short-term, but
in the long-run, we are maintaining our Zacks ETF Rank of 4 or
'Sell' on EWP. So adventurous investors may want to consider
nibbling on EWP here, but those with an outlook of more than few
months should still shy away from this uncertain economy.
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BANCO BILBAO VZ (BBVA): Free Stock Analysis
ISHARS-SPAIN (EWP): ETF Research Reports
TELEFONICA S.A. (TEF): Free Stock Analysis
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