The ripples of the euro zone crisis were felt both by the developed and the emerging nations in the form of deceleration in overall economic growth and investor risk aversion. This led to extreme stock market volatility and decreased corporate earnings in any firm that had heavy exposure to the region (Are German ETFs in Trouble?).

However, one of the economies which showed strong resilience to the downturn was France. The country thrived in spite of the deep recession and debt crisis raging in southern Europe. But the fact also cannot be ignored that the economy has not been able to post healthy growth since October 2012.

Now the second largest economy of the euro zone appears to be in jeopardy. The reason behind the fallout is a rising budget deficit level accompanied by the economy’s declining competitive edge.

It should be noted that at the end of fiscal 2012, the budget deficit of the French economy stood at 4.5%. According to French authorities, it will take a good five years to balance their budget. The International Monetary Fund projects France’s debt-to-GDP ratio to increase by 12 percentage points for the period 2009-14.

 2013 and Beyond

For 2013, President François Hollande has set a goal of reducing France's budget deficit to 3% of GDP. However, it is widely believed that reducing deficit in a weak economy gets tougher because of lower tax revenues exacerbated by higher spends on welfare by the government (Bet on the Euro with These 3 ETFs)

France’s lack of competitive appeal is also adding to its difficulties. Higher labor and production costs when compared to competitive goods from Asia and other European neighbors are threatening to push the French economy into another slump.

Losing competition to Asia and other European countries will inevitably lead to a fall in exports and an eventual decline in manufacturing activities and the services that support them.

In a replay motion, the second largest economy of Europe, France is going through the same tribulations suffered by its Southern European counterparts. But what is more shocking is that France is doing nothing to prevent the freefall. Italy and Spain at least tried to implement structural reforms to tackle the crisis.

Furthermore, a high unemployment level also remains a matter of concern for the economy. While the economy reported a GDP growth rate of just 0.1% in 2012, unemployment still hovers around the 14-year high of 11%.

Also, recently Moody's Investor Services downgraded the sovereign bond rating of the economy. The sovereign bond rating has been downgraded one notch from Aaa to Aa1 with a negative outlook.

This was the second rating downgrade for the French economy in fiscal 2012 as rating agency Standard & Poor's had earlier downgraded France to AA+ form its supreme AAA rating (France's Credit Downgrade: How Does it Impact the French ETF?).

To sum it up, France’s economic prospects appear to be gloomy with high levels of fiscal deficit, a weak competitive position and diminishing exports. For U.S. investors, the main way to play the French economy through exchange traded funds is the iShares MSCI France Index Fund (EWQ).

France ETF in Focus 

EWQ, which is the lone ETF following the French economy, tracks the MSCI France Index. EWQ is relatively popular among investors, having amassed over $475.1 million in assets on an average daily trading volume of over 1 million shares a day.

The fund allocates its rich asset base in 73 French securities and is moderately concentrated in the top ten holdings with 50% allocation (A Technical Look at the French ETF: EWQ).

Among individual holdings, pharma giant Sanofi, integrated oil and gas company Total SA and banking firm BNP Paribus form the top line of the fund with asset investment of 10.62%, 10.0% and 5.18%, respectively. Among others, the fund does not invest more than 4.10% of the asset base.       

EWQ has done an excellent job of allocating the asset base to various sectors. It puts 16.4% in industrials, 15.95% to financials, and 13.75% to consumer discretionary.  The fund appears to be light on the technology sector with just 2.93% of asset invested. EWQ charges a fee of 51 basis points annually from its investors.

Looking at the ETF's 2012 performance, it seems that the fund was the least impacted by the downturn in the economy and the series of downgrades. The fund despite the gloomy environment continued to perform remarkably well and posted a solid gain of 21.4% in 2012.

However, in the year-to-date period, the fund has seen greater trouble and could be poised for a downturn this year. That is why we are maintaining our Zacks ETF Rank of ‘4’ or Strong Sell on this fund, as recent events suggest it could be another rough year for Europe this time around.

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ISHARS-FRANCE (EWQ): ETF Research Reports
 
ISHARS-EMU IDX (EZU): ETF Research Reports
 
VIPERS-M EUROPN (VGK): ETF Research Reports
 
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