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.
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
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
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
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
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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