Spain ETF: Here We Go Again - ETF News And Commentary
27 September 2012 - 12:31PM
Zacks
Thanks to recent moves by the ECB, and especially the promise by
Draghi to buy up sovereign debt if highly indebted nations ask for
the help, European stocks have been back on track in recent weeks.
Prices for a variety of European-based stocks and European ETFs
have been strong performers to end the third quarter of the year,
suggesting that the mere threat of bond buying may have been enough
to stave off a true crisis (see Are The Troubled European ETFs Back
on Track?).
This temporarily put many investors focused in on the region at
ease, allowing many to worry about other issues for the time being.
Yet while it appeared to be somewhat of an end to the crisis, it
may have actually just been the eye of the storm, as evidenced by
the recent anti-austerity protests in Greece, and especially
Spain.
Spain Crisis
The country of Spain, one of the largest economies in the world,
was at the brink just a few months ago before some key steps were
taken by important forces in the EU. However, protests are already
starting to appear over a proposed, austerity heavy budget while
there are also concerns that the nation may also face a growing
separatist movement from the rich eastern state of Catalonia—home
of Barcelona-- to further add to the national woes.
It also remains to be seen how much austerity a country that has
an unemployment rate of 25% can actually endure, as further
measures that put more people out of jobs are unlikely to be
well-received with this kind of economic backdrop (read Three
Resilient European ETFs Still Going Strong).
Clearly, the crisis in Spain is nowhere near the finish line, as
evidenced by the intense protests in Madrid and the sovereign bond
rates that are now trending back up towards the 6% mark. Add in
worries over debt downgrades and an independent audit of Spain’s
banks in the very near future, and it now is pretty clear that
those who thought an end to the crisis was at hand were naïve at
best.
Thanks to this uncertainty investors should look for one of the
only pure play ways to target the country, the iShares MSCI
Spain Index Fund (EWP), to be in focus once again. The
product was down about 4.4% in just the first few days of the
pre-budget protests on high volume, suggesting that the ETF could
be in for some pain once again if the crisis continues to
escalate.
This could be especially true for ETF investors thanks to the
holdings breakdown of EWP which is heavily skewed towards financial
securities, in other words, one of the segments most impacted by
the current malaise. In fact, two of the top three holdings are
banks, while financials account for 42% of the assets in total.
Beyond these two segments, telecoms and utilities make up
another 40% combined, so at least there is some semblance of safety
in the product, even if financials face more scrutiny.
Additionally, the 30-Day SEC yield is quite robust at 4.7%,
suggesting that the payout could be a nice backstop against further
losses (see How to Play the Spain ETF (And the Euro Zone
Slump)).
Investors should also note that the current price trajectory of
the fund represents somewhat of a disappointing trend for EWP, as
the product, in most of August and September, recouped nearly all
of the losses that it suffered in the rough stretch from
April-July. In fact, even with the recent slump, EWP is still up
over 25% in the trailing three month period, although the Spanish
ETF is still down over 8% on a year-to-date look.
Clearly, investors who are looking to trade—or are bold enough
to invest in EWP at this time—need to pay a great deal of attention
to political events in the nation for clues on the country’s
direction going forward (also read Pain in the Spain ETF
Continues).
The Spanish government has to walk a very difficult balancing
act between austerity and anarchy, so while gains could be had in
the Spanish ETF in the short term, it is clear that the nation is
still a very risky market, even with some of the key developments
in recent months by the ECB. This suggests that while the ECB can
help, it may not always be a perfect substitute for a better
economic environment, and that we may still be in the depths of
this crisis in the PIIGS markets after all.
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ISHARS-SPAIN (EWP): ETF Research Reports
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