Investing in European equity market turned out of investors'
favor in recent weeks primarily on a flurry of negative economic
indicators and bitter relationship between Russia and the West.
Weak corporate earnings, Portuguese banking woes as well as
escalating violence in Iraq, Ukraine and the Gaza Strip continue to
weigh upon the growth of European economy (read:
Where Will Europe ETFs Go After Portugal Banking
Economic and political issues have also pushed the euro down
against the greenback. The second-most traded currency in the world
dropped to an eight-month low in Tuesday trading. Further, an
improving U.S. economic and accelerating job market are driving the
Stalling Economic Recovery
Despite the recent unprecedented European Central Bank's (ECB)
stimulus, Europe is struggling to boost growth and inflation. This
is especially true, as the Euro zone (18-nation bloc) is expected
to grow a tepid 0.1% in the second quarter (data due to be released
on Thursday) after 0.2% growth in the first thanks to ongoing
deleveraging by the private sector, tight fiscal policy,
restrictive credit conditions and high unemployment (read:
3 European ETFs to Buy After ECB Action
Germany, the powerful engine and the largest economy of Europe, is
now showing signs of faltering. German investor confidence, as
depicted by ZEW, plunged to the lowest level in more than one and
half years at 8.6 in August from 27.1 in July. As such, the economy
is expected to show no growth in the second quarter compared with
0.8% in the first quarter due to the Ukraine crisis and tougher
sanctions on Russia.
Apart from Germany, growth in most of the economies in the Euro
zone remains weak and uneven. Italy, the third-largest economy,
slips back into recession in the second quarter shrinking 0.2%,
more than 0.1% contraction in the first quarter.
Euro zone inflation fell to a five-year low of 0.4% in July,
miserably lower than the ECB target of 2%. Though unemployment
slightly fell from 11.6% in May to 11.5% in June, it is still near
a record high of 12%. All these macro data indicate heightened
worries that Europe could enter a Japanese-style deflationary
Russia Import Ban to Hurt Growth
Russia has imposed a tit-for-tat ban on food imports for one-year
from the Western countries, including Europe, in retaliation to
sanctions imposed on it over the annexation of Ukraine. The move
came after the West put tougher sanctions on the companies
targeting the Russian energy, defense and financial sectors (read:
Russian Food Import Ban Takes a Bite Out of These
The food embargo will likely hurt the fragile European recovery
extensively, as the European Union (EU) is the second biggest
exporter of food products to Russia, accounting for about €11.8
billion ($15.8 billion) of food to Russia. In fact, Russia buys
31.5% of its meat, 42.6% of its dairy products, and 32% of its
vegetables from Europe, according to the Institute for Complex
Strategic Studies (ICSS).
Given these concerns and the gloomy outlook over the health of the
economic growth, the appeal of Europe ETFs seems to be dulling.
This would be especially true if exchange of trade sanctions
continue to escalate leading to more bans on trade in European oil
and natural gas industry.
As a result, investors who are bearish on Europe right now may want
to consider a near-term short on the country and its currency.
Fortunately, with the advent of ETFs, this is quite easy as there
are many options for accomplishing this task. Below, we highlight
those and some of the key differences between each:
Daily FTSE Europe Bear 3x Shares (
This ETF seeks to deliver three times (3x or 300%) the inverse
(opposite) daily performance of the FTSE Developed Europe Index.
The benchmark measures the performance of the large and mid cap
securities of the 17 developed market countries: Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland and the United Kingdom.
The product is unpopular with AUM of $3.9 million while charges 95
bps in fees and expenses. It trades in paltry volumes of nearly
2,000 shares per day, suggesting additional cost in the form of a
wide bid/ask spread. The fund gained 14.7% over the trailing
ProShares Short Euro (
This fund seeks to deliver the inverse return of the daily
performance of euro versus the U.S. dollar. It is often overlooked
by investors having just $16.3 million in its asset base while
volume is light under 6,000 shares per day. It charges 95 bps in
annual fees and added 1.8% in the same time period (see:
all the Inverse Equity ETFs here
ProShares UltraShort Euro ETF (
This fund seeks to deliver twice (2x or 200%) the inverse return of
the daily performance of euro versus the U.S. dollar. It has
attracted $458.2 million in its asset base and trades in solid
volume of 537,000 shares per day. Expense ratio came in at 0.95%.
The ETF added 3.5% over the last one month.
Market Vectors Double Short Euro ETN (
This ETF tracks the Double Short Euro Index, which is two-times
leveraged. This means that 1% weakening of the euro relative to the
U.S. dollar would increase the index value by 2% and vice versa.
The fund has managed assets of $37 million so far in the year and
trades in light volume of 4,000 shares a day. This suggest a wide
bid/ask spread increasing the total cost for the product beyond the
annual fees of 65 bps. The ETF is up 4.1% in the same period.
As a caveat, investors should note that such products are extremely
volatile and suitable only for short-term traders. Additionally,
the daily rebalancing-when combined with leverage-may make these
products deviate significantly from the expected long-term
performance figures (read:
2 Great European ETFs to Buy in an Uncertain
Still, for ETF investors who are bearish on the European equity
market and its currency for the near term, either of the above
products could make an interesting choice. Clearly, a near-term
short could be intriguing for those with high-risk tolerance, and a
belief that the "trend is your friend" in this corner of the
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DIR-D EUR3XBR (EURZ): ETF Research Reports
PRO-SH EURO (EUFX): ETF Research Reports
PRO-ULS EURO (EUO): ETF Research Reports
MKT-VEC DB S EU (DRR): ETF Research Reports
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