PIIGS ETFs Have Shown An Impressive Turnaround

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October 7, 2013 10:36pm NYSE:EIRL NYSE:EWI

europeThe U.S. markets continue to rise this year and reached a new all-time high again last month. This is primarily attributable to an improving labor market, solid retail data and a recovering housing

market. The recent surprise move by of the Fed of keeping the $85 billion bond purchase program unchanged gave further boost to equity markets across the globe.

This is especially true give that the broad U.S. equity fund – SPDR S&P 500 ETF (NYSEARCA:SPY) – is up nearly 20.7% in the year-to-date time frame.

At the same time, Europe has also been rebounding impressively on rising consumer confidence, declining unemployment rates, firmer currency, less concern on debt levels as well as improving manufacturing and service sectors (read: 4 Outperforming ETFs Leading Europe Higher).

In fact, the PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries, often considered the weakest members in the euro zone, have shown an impressive turnaround of late in Europe. ETFs tracking this group have easily outpaced both SPY and the broad European funds such as (NYSEARCA:VGK) and EZU over the trailing one-month period:


The much-troubled Greece appears to be in a better position than where it was at the start of the year with signs of gradual deceleration in the country’s longest recession. The economy shrank 4.6% in the second quarter, less than the 5% forecast and much below the 5.6% decline in the first quarter.

Though high unemployment and bailout targets pose major risk to the country’s growth story, the optimism in the euro zone, shift from budget deficit to surplus and a strong tourism season is aiding economy to move in the right direction going forward. This trend can easily be seen from the performance of GREK, the only ETF tracking the nation.

The ETF has gained over 14% over the trailing one month, indicating a huge reversal in trend, which was deep in red. The product manages an asset base of $62.6 million and is home to a small basket of 22 companies (read: Greece ETF on the Rise, Can It Continue?).

The ETF has heavy exposure to the top three firms – Coca Cola HBC ADR, Piraeus Bank SA  and Hellenic Telecom – that collectively make up for roughly 30% of total assets. From a sector look, consumer discretionary dominates the fund portfolio at 39%, closely followed by financials (15%). The fund charges a fee of 65 basis points on an annual basis.

iShares MSCI Spain Capped ETF (NYSEARCA:EWP)

The Spanish economy is close to stabilization with contraction of just 0.1% in the second quarter. It is expected that the country will soon emerge from a long and deep recession by the end of the year due to a gradual rise in exports while domestic demand remain laggards.

Investors seeking to tap this opportunity could find EWP an intriguing choice. The fund has accumulated AUM of $559 million and holds a small basket of 25 securities. The product added nearly 8% in the trailing one-month period while charging 50 bps in annual fees.

The fund puts a higher allocation to the top three firms – Banco Santander, Telefonica and BBVA – which make up for a combined 45.5% of the total assets. Further, the ETF is heavily concentrated on financials at 44% while telecom services (13.18%), industrials (12.48%) and utilities (121.41%) round off to the next three spots.

iShares MSCI Italy Capped ETF (NYSEARCA:EWI)

Italy is showing early signs of bottoming out of its longest post-war recession as the economy contracted less than expected in the second quarter. While political crisis could disturb the Italian recovery, the government expects economy to be back to equilibrium in the third quarter and return to growth in the fourth.

Improved consumer demand, pickup in industrial activity and fiscal consolidation is expected to fuel growth in the economy. Investors seeking to play this growing trend could focus on EWI, which holds roughly two dozen Italian firms in its basket. The fund has amassed $786.7 million in its AUM while charges 50 bps in annual fees. The ETF gained nearly 6.5% in the trailing one-month period.

The product is heavily concentrated on the top firm, Eni, at 19.17% of assets while other securities hold less than 7.2% share. Further, the fund is focused from a sector perspective with financials (29.91%) and energy (24.41%) taking the top two positions.

iShares MSCI Ireland Capped Investable Market Index Fund (NYSEARCA:EIRL)

The Irish economy has finally emerged from nine months of recession with growth of 0.4% in the second quarter on the back of increasing consumer spending, improving housing market, reviving domestic demand as well as rising exports.

These growing fundamentals suggest that the nation would smoothly exit its bailout program at the end of the year and reflect  political stability and reputation for the country. Further, investors should note that Ireland is rapidly trying to emerge as a stronger nation among the other PIIGS members. However, high public debt and unemployment rates are still headwinds to economic growth.

The Ireland ETF added over 5% over the trailing one month and accumulated $90.6 million in AUM. The fund holds 25 securities with heavy concentration in the top three firms – CRH Plc, Kerry Group and ELAN Corp. – as these make up for the combined half of the portfolio (read:S&P Upgrades Ireland Outlook: Time for the Irish ETF?).

Additionally, the product is skewed toward materials at roughly 32%, while industrials and consumer staples take the next two spots. The product charges 50 bps in fees per year from investors.

Bottom Line

Although the PIIGS economy seems better positioned than many other European countries in the coming months, it has a long way to go. Investors should note that the overall outlook for the bloc is still quite negative and that some more pain could be in store for this group.

We currently have a Zacks ETF Rank of 4 or ‘Sell’ rating on all the four PIIGS countries. This suggests that the longer-term picture is still bleak for these funds. Investors should look at other markets in Europe – or at least broader funds – for exposure, rather than taking risk on an unlikely rally continuing in PIIGS shares.

This article is brought to you courtesy of Eric Dutram.

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