McCall’s Call: Eurozone Woes Spell G-L-D


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The re-emergence of the troubles in Europe is the latest negative news to hit stock markets around the globe. The PIIGS-Portugal, Ireland, Italy, Greece and Spain-as they are so aptly named, are back in the headlines and investors are again wondering whether a few bad apples might spoil the barrel.

Matthew D. McCall Over the weekend, Italy's credit rating was downgraded by Standard & Poor's to negative on concerns that political gridlock could hamper any debt-reduction plans. Adding to that downgrade was a Spanish election in which the ruling party took major losses in local polling. This is bad because it could hurt the nation's attempts to cut spending.

The other three PIIGS have already been involved in some type of bailout and, on Friday, Fitch Ratings cut Greece's debt rating again. All in all, the economic climate in Europe is, at best, questionable, leading selling there and in other markets around the globe.

It's worth looking at a number of ETFs to take measure of what's happening and what's likely to happen.

I'll say it right up front:Things don't look good right now and, in the spirit of full disclosure, readers should know that my firm's single-biggest holding is SPDR Gold Shares (NYSEArca:GLD), the world's biggest physical bullion ETF that's been gaining renewed traction in recent days.

Europe Vs. US - The Numbers

Apart from GLD, let's start with the euro, which has been caught up in the continent's woes after it reached a 52-week high in early May. The Rydex CurrencyShares Euro ETF (NYSEArca:FXE) is down over 5 percent in the last three weeks to its lowest level in two months.

As far as stocks go, this year through May 23, European stocks had been outperforming the U.S. indexes, even though most of the world's current economic problems appear to be originating in their continent. The iShares S&P Europe 350 Index ETF (NYSEArca:IEV) is up 6.1 percent versus a gain of 5.0 percent for the SPDRs S&P 500 ETF (NYSEArca:SPY).

The results are even more surprising when you look at single-country ETFs. Three of the PIIGS have ETFs that track their country, and all three are easily beating the SPY this year. The iShares MSCI Spain ETF (NYSEArca:EWP) is up 10.2 percent, the iShares MSCI Italy ETF (NYSEArca:EWI) up 8.0 percent and the iShares MSCI Ireland Capped Investable Market ETF (NYSEArca:EIRL) is also up 8.0 percent.

But the 2001 performance numbers may be deceiving, because both EWP and EWI took big losses in 2010, down 23.5 percent and 16 percent, respectively. This compares with a gain of 13.4 percent for SPY. EIRL wasn't around for all of 2010, which is why it's missing from current analysis.

Still, considering most investors have their money in the market for longer than the year or two we're analyzing, it's important to look at longer-term track records for the ETFs and, over that time period, the wheat definitely gets separated from the chaff within Europe and compared with the U.S.

Over the last five years, an investment in SPY would have returned 6.2 percent. The Italian ETF, EWI, lost 37.6 percent and the Spain fund, EWP, was down 0.3 percent.

The big winners in Europe over that time frame were the iShares MSCI Sweden ETF (NYSEArca:EWD), with a gain of 33.5 percent, and the iShares MSCI Switzerland ETF (NYSEArca:EWL), with a gain of 26.8 percent.

Looking Ahead

Such statistics give us a good feel as to what the European and U.S. markets have done in the past; however, as we all know, investing hinges on the future.

And, because Europe's economic situation is far-reaching, it will affect the U.S. stock market because we live in a global economy that's intertwined. Specifically, if bailouts continue in Europe, they will directly affect banks and other companies based in the U.S. that do business in Europe.

In the end, I feel things will get worse before they get better and, to that extent, I'll take a cautious approach to new investments in the U.S. and Europe.

Investors may hammer stocks for a while if Europe's problems continue to be a central concern, but there's no doubt in my mind that whatever selling takes place will generate attractive buying opportunities for investors willing to take some risk for healthy rewards.

Once I feel the dust has settled, I'll revisit the situation and talk about my favorite European ETFs.

In the meantime, as I suggested at the outset, the one ETF that should continue to outperform is GLD. The euro has been getting hit due to the PIIGS' problems, and if the U.S. doesn't start to generate stronger economic numbers, it will force investors out of currencies and into gold as an alternative.

Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a Ridgewood, N.J.-based wealth management firm specializing in investment strategies using ETFs.

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Copyright ® 2011 Index Publications LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
More Headlines for: EIRL , EWD , EWI , EWP , FXE

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