Traders are wondering which European shoe will be the next to
drop - and they are not contemplating Christian Louboutins or
Pradas. Instead, these traders are considering Euro Zone members.
All eyes appear to be on Italy as the next European problem child
to need some form of financial assistance, also known as a
Mired in a recession, Italy has one of the highest debt to GDP
ratios in the developed world. That metric could top 129% this
year and Citigroup has said Italy's debt/GDP could reach 137% in
2014. Not to mention, as the Euro Zone's third-largest economy,
financial assistance for Italy would be a daunting task, perhaps
one that can't be fulfilled.
Italian banks, while not quite in the dire straits as their
Spanish counterparts, are not in the best of health. Investors
have speculated that excess capital or lack thereof is an issue
in the Italian financial system. That might be one reason why
yields on 10-year Italian sovereigns were around 5.83% on Monday.
The OECD forecast that Italy's economy will shrink 1.7% this year
is almost certainly another reason Italian bond yields remain
high and investor skepticism about Italy continues to be
To trade Italy's future, ETF investors can explore more than
just the iShares MSCI Italy Index Fund (NYSE:
). These other ETFs could be sensitive to glum news out of Italy
going forward. Some members of the list may be surprises.
Global X FTSE Argentina 20 ETF (NYSE:
This one may come as a surprise to some folks, but the Global X
FTSE Argentina 20 ETF makes a list involving Italy because ARGT
allocates about 14% of its weight to bank stocks. That's not the
problem. What is the problem is that some Argentine banks are
heavily exposed to European sovereign debt
Several European Union countries, including Italy, enjoy
trading partnerships with Argentina, but there is speculation
those relationships have become strained in the wake of the
Argentine government nationalizing YPF S.A. (NYSE:
). That move has hurt Argentina with key economic partners and
black cloud over ARGT
PowerShares S&P International Developed High Beta
The PowerShares S&P International Developed High Beta
Portfolio, which debuted in February, lives up to its name and
doesn't skimp on beta or exposure to controversial European
nations. While stodgy Sweden represents almost 18% of IDHB's
weight, five Euro Zone members combine for about 40% of the
fund's weight, including a 10.3% allocation to Italy. Again, IDHB
isn't for the faint of heart as it devotes almost a third of its
weight to bank stocks.
PowerShares DB Italian Treasury Bond Futures ETN (NYSE:
ITLY tracks the DB USD BTP Futures index, which features
securities with an original term of no longer than 16 years and
remaining term to maturity of not less than 8 years and 6 months.
The ETN has a leveraged cousin in the form of the PowerShares DB
3x Italian Treasury Bond Futures ETN (NYSE:
As one might imagine, owning ITLY and ITLT hasn't been good
for a portfolio's health recently. The fund's are down 5.8% and
16.5%, respectively, in the past three months.
WisdomTree Europe SmallCap Dividend Fund (NYSE:
In a more sanguine market environment, the WisdomTree Europe
SmallCap Dividend Fund would be an ETF plenty of folks would want
to cozy up to. The combination of global stocks, dividends and
small-caps under one umbrella is compelling, but a deeper look at
this fund leaves one thinking "not now, maybe later."
Industrial, consumer discretionary and financial services
names combine for about 62% of DFE's weight and those are sectors
to be avoided amid Europe's backdrop of slowing growth. As if
that's not bad enough, all of the PIIGS except Greece are
represented in DFE. Italy leads the way with a weight of 8.8%. No
wonder this ETF is down almost 12% in the past three months.
For more on Italy ETFs, please click
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