The euro zone is experiencing the longest streak of recession
in its 14-year history. While the crisis was initially contained
in three of the troubled PIIGS - Portugal, Greece and Spain -the
malaise is now spreading over to a number of other large markets,
specifically France (read:
Avoid These 3 Eurozone ETFs This Summer
Inside the French Economy
The second largest economy of the euro zone appears to be in
jeopardy and has shown resilience to the downturn since the
fourth quarter of 2012. The reason behind the fallout is rising
budget deficit, declining competitive edge and rigidities in
labor markets. The budget deficit has widened to €31 billion as
of March 2013, from €29.4 billion in the year-ago period.
The economy is struggling with deep structural issues such as
a declining rate of productivity growth, low profit margins and
deteriorating export performance that are affecting the growth
potential in France.
Additionally, higher labor and production costs when compared
to the competitive Asian and other European markets are pushing
the French economy into another slump (read:
Worried About Japan? Try This Top Ranked Asia ETF
Furthermore, a high unemployment rate and lackluster GDP
growth remain matters of concern for the economy. In the first
quarter of 2013, the economy entered into recession for the
second time, contracting 0.2%. Unemployment still hovers around
the 14-year high of 11%, more than double that of Germany's 5.4%
Given these weak fundamentals, the IMF now projects the French
economy to contract 0.2% in 2013 compared to the previous
forecast of a 0.1% decline. For 2014, the agency expects economy
will grow by 0.8%, slightly below the previous forecast of
French President François Hollande is committed to introduce
economic reforms that would lower labor cost, boost
competitiveness and salvage the country from falling behind its
neighbors. The IMF, however, feels that this would be a difficult
Time to Sell the France ETF?
Italy and Spain have made significant structural reforms in
recent months, especially for their labor markets, to tackle the
crisis. These reforms are expected to soon begin bearing fruit
and put more pressure on France.
French President François Hollande has begun to take steps
that could eventually make the labor market more competitive.
Additionally, the nation is trying to trim its budget gap from an
expected 3.7% of GDP in 2013 to zero deficit by 2017 by squeezing
public spending and bolstering competitiveness.
Though the current economic and political conditions in France
appears depressing, the economy might turn around in the second
half of the year if the expected reforms succeed in aiding
economic growth (read:
Three Country ETFs Struggling in 2013
ETF in Focus
Investors seeking to tap the opportunity from the current
depressed economy have
iShares MSCI France Index Fund (
- the only pure option play targeting the country.
The ETF tracks the MSCI France Index, which measures the
performance of the French equity market. With holdings of 71
securities, the product is moderately concentrated in the top 10
holdings with 50.6% allocation.
Among individual holdings, the pharma giant Sanofi, integrated
oil and gas company Total SA, and banking firm BNP Paribus occupy
the top three positions in the fund's portfolio with 11.2%, 9.5%
and 5.20% share, respectively. Among others, the fund does not
invest more than 4% of the asset base in a single security.
The product is highly diversified across a variety of sectors.
Industrials, financials, healthcare, consumer discretionary,
consumer staples and energy make up for the double-digit
allocation with less than 18% share each (read:
Defensive Sector ETFs Leading the Market
EWQ is relatively popular among investors, having amassed over
$510 million in assets on average daily trading volume of more
than 980,000 shares a day. The ETF charges a fee of 50 bps
annually from its investors.
Looking at the fund's performance, it seems that the fund was
the least impacted by the downturn in the economy. Despite the
gloomy conditions in the French economy, the product continued to
perform remarkably well and posted a solid gain of 6.32% in the
year-to-date timeframe and 41.52% in the trailing one-year
With these returns, the France ETF is leading the broader
European funds significantly. The product has outperformed the
most popular Vanguard FTSE Europe ETF (
), iShares MSCI EMU Index Fund (
), iShares MSCI Germany Index Fund (
), iShares MSCI Italy Index Fund (
) and iShares MSCI Spain Index Fund (
) by wide margins.
Just remember that the overall outlook for France is still
quite negative and that some more pain could be in store for this
nation. This could be especially true if France's economic and
political issues spiral out of control, or if other problems turn
up in the budget deficit control and the restoration of
competitiveness, or if reforms do not help to alleviate economy
from the downturn.
For this reason, the longer term outlook still isn't very
positive for EWQ. The country still has a host of problems and
its fund is likely to have significant trouble (see more
As a result, in the long run, we are maintaining our Zacks ETF
Rank of 4 or 'Sell' on EWQ. So, adventurous investors may want to
consider nibbling on EWQ here, but those with an outlook of more
than a few months should still shy away from this uncertain
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ISHARS-FRANCE (EWQ): ETF Research Reports
ISHARS-EMU IDX (EZU): ETF Research Reports
VANGD-FTSE EUR (VGK): ETF Research Reports
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