Economic conditions in the euro zone remain uncertain as the
bloc is experiencing a long recession streak, which was
aggravated by harsh winter conditions in the first quarter.
Initially, the trouble was limited to Portugal, Greece and Spain,
but now it is spilling over to other regions, including France,
However, Germany, the largest economy in the region and the
heart of the euro zone, has well endured the recent pullback in
European markets. The nation is arguably the strongest performer
and one of the key leaders in the ongoing the euro zone crisis
Avoid These 3 Eurozone ETFs This Summer
Bright Spot in Europe?
Germany has a stable labor market, high level of employment
with wage increases, moderate inflation and a low government
deficit, suggesting that the country is still on a relatively
solid footing compared to the other Euro zone members.
The economy narrowly escaped recession and returned to a mere
growth of 0.1% in the first quarter after contracting 0.6% in the
fourth quarter last year. The improvement was driven by strong
household spending and a low unemployment rate.
The unemployment rate was close to its lowest level at 6.8% in
May, below 7.1% in April. Debt remained stable at 81.9% of GDP in
2012. The nation still possesses an 'AAA' credit rating from all
the three rating agencies - Standard & Poor, and Fitch and
Moody's - for the long term.
Despite the worries in the Euro zone, many expect the German
economy to rebound speedily in the second half of the year as
construction activity picks up and exports gain momentum (read:
Can This High Yielding European ETF Surge
Further, the country's well-equipped infrastructure, lower
business costs, fair labor laws, efficient transport system,
central location and large market size make it a safe bet for
investors seeking exposure to the Euro zone without too many
Euro Zone Crisis: Bigger Concern
While long-term prospects are encouraging, a deep recession in
Euro zone is holding back German growth. The Bundesbank has
reduced the economic growth forecast from 0.4% to 0.3% for the
year and from 1.9% to 1.5% for the next. In addition, the IMF
also cut its 2013 outlook to 0.3% from 0.6% earlier this
These below half percent mark projections suggest that Germany
is far from growth of 3.0% and 4.2%, seen in 2011 and 2010,
respectively. Also, the country could be extremely close to
falling back into a recession this year (read:
Are German ETFs in Trouble?
EWG in Focus
That said, the most popular and oldest German ETF on the
market has seen huge popularity and fund inflows of late. The
iShares MSCI Germany ETF (
has attracted over $1.2 billion since May, propelling its total
asset base to around $4 billion. Volume is quite high on the ETF
while bid/ask spreads are tight, suggesting total costs should be
right around the 0.50% mark.
The fund tracks the MSCI Germany Index, holding 53 securities
in the basket. The portfolio consists primarily of large cap
stocks, with a focus on consumer discretionary, financials,
materials, health care and industrials. Assets are relatively
well spread out with Bayer, BASF and Siemens taking the top three
spots and making up at least 8% of total assets.
In terms of performance, the fund was least impacted by the
downturn in the Euro zone. EWG continues to perform remarkably
well and is barely holding onto a gain in the
year-to-date timeframe and 27.9% in the trailing one-year period
3 European ETFs Holding Their Ground
With these returns, the German ETF is leading the broader
European funds significantly. The product has outperformed the
most popular Vanguard FTSE Europe ETF (
), iShares MSCI EMU Index Fund (
) by wide margins.
Just remember that the overall outlook for Germany is still
quite positive even as we are well into summer and near the end
of the second quarter. Given the strong fundamentals, the German
economy is expected to improve again as other Euro zone economies
bottom out and the world economy gains momentum (see more
In the long run, we are currently maintaining our Zacks ETF
Rank of 3 or 'Hold' on EWG. This suggests that we are waiting to
see more positive momentum in the economy, though signs are
certainly encouraging, especially when compared to other markets
in the region.
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ISHARS-GERMANY (EWG): ETF Research Reports
ISHARS-EMU IDX (EZU): ETF Research Reports
VANGD-FTSE EUR (VGK): ETF Research Reports
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