Are German ETFs In Trouble? (EWG, GERJ, FGM)
Eric Dutram: Although Europe started 2012 with a bit of weakness, the troubled region managed to find its footing and finish the year on a relatively solid note. In fact, some are saying that the worst of the European crisis is behind us, and that the economies on the continent can finally begin to march back higher.
This will of course need to be done with a large push from Germany as the country is the largest economy in the region and the heart of the euro zone. The nation is also seen by many as one of the stronger economies and one of the key leaders during the euro zone crisis.
Due in part to this, the recent German GDP report appears especially troubling. That is because the report showed that total GDP for the country declined by 0.5% in the final quarter, marking the worst performance since the global crisis began in 2008-2009.
The GDP decline also helped to push the year growth level down to 0.7%, a far cry from the previous two years which saw growth of 3.0% and 4.2%, respectively, for 2011 and 2010. Things aren’t looking much better for 2013 either, as growth projections are looking to come in around the half percent mark, suggesting that Germany could be perilously close to falling back into a recession.
If that wasn’t enough, the euro currency has also been quite strong, a situation that could further hurt the German market. That is because Germany is one of the biggest exporters in the world and a strong currency makes their exports less competitive on the global stage, a situation that, if it continues, could also negatively impact the German market heading further into 2013 (see 3 Developed Market ETFs Crushing American Stocks).
Still, even with these broad negatives, it isn’t all bad news for the country, as many of its weaker neighbors appear to have bottomed out, at least for now. Germany also still has a strong housing market, high levels of employment, and wage increases, suggesting that the country is still on a relatively solid footing.
Investors should also note that broad German ETFs have outperformed their American counterparts over the trailing one year period by a relatively wide margin. However, in the year-to-date time frame, the S&P 500 has taken the leadership role between the two and if this trend continues it could be more bad news for those focused on Europe in the short-term.
For investors concerned about this economic stalwart and what it means for the broader global economy, it could be worth it to keep an eye on the following German ETFs in the months ahead to see if they can get through this soft patch, or if they will continue to outperform their American cousins over the long-haul:
iShares MSCI Germany ETF (NYSEARCA:EWG)
This is easily the most popular and oldest German ETF on the market having amassed over $4 billion in AUM with a debut in 1996. Volume is quite high on the ETF while bid ask spreads are tight, suggesting total costs should be right around the 0.51% mark (see Three European ETFs with Incredible 2012 Gains).
The portfolio consists primarily of large cap stocks, with a focus on consumer discretionary, financials, materials, industrials, and health care. Assets are relatively well spread out with Siemens, BASF and Bayer taking the top three spots with all making up at least 8% of total assets.
Market Vectors Germany Small Cap ETF (NYSEARCA:GERJ)
This ETF hasn’t really caught on with investors, despite offering up a completely different exposure profile than EWG in one of the world’s most important economies. Volume is quite light, net assets are below $10 million, and expenses are just 55 basis points a year.
The ETF has been more volatile than its large cap cousin, but in bull markets it usually outperforms thanks to its pint-sized nature. Top sectors include industrials, financials, and consumer discretionary, while in total the ETF has 83 securities in its basket.
First Trust Germany AlphaDEX Fund (NYSEARCA:FGM)
For a more quantitative approach, investors have this product from First Trust which looks to zero in on the best German stocks—and avoid the worst—by using the AlphaDEX methodology. This approach does reduce the total number of holdings to 40 though, while it makes the expense ratio a high 80 basis points a year (read Beyond Germany: Three European ETFs Tracking Strong Countries).
The portfolio is extremely spread out though, with no one security accounting for more than 5% of assets, so company specific risk isn’t much of an issue. Meanwhile, from a sector look, consumer discretionary accounts for about 30% of assets, trailed by 22% in materials for this German focused First Trust fund.
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