Three ETFs To Watch On German Election Results

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September 29, 2013 10:20pm NYSE:BUND NYSE:EWG

germanyThe European economy is showing strong improvement lately on upbeat data, lower levels of debt and a firmer currency. Meanwhile, the latest election news from Germany, the biggest


and most important European economy, has kept the whole of European market on watch.

Election Details

German Chancellor Angela Merkel and her party once again received the green light to continue their third term. Merkel’s current coalition partner consist of her own Christian Democratic Union (CDU) party, its Bavarian sister party the Christian Social Union (CSU), and the Free Democratic Party (FDP).

Merkel’s CDU and CSU won with a huge 41.5% of the vote, suggesting her fabulous victory for the third time. However, the election results raised doubts on the continuation of government with its previous coalition partner, FDP, as the party got only 4.8% of the vote. This was less than the 5% required to gain seats in the parliament.

The lower number of votes to FDP might create some political disorder in Germany and force Merkel into a grand partnership with its major opposition party Social Democratic Party (SDP), which won 25.7% of the vote (read: Time to Get on the German ETF Bandwagon?).

New Coalition Party: A Major Headwind 

The Chancellor, in her third term, would likely face tough challenges in forming a stable governing partner and its impact on economic growth. In order to form a coalition, Merkel might have to agree with the SDP demand of introducing minimum wage and higher taxes for the top level, which could hamper the job market. The Chancellor had previously opposed to both policies during her campaign.

Further, the grand collation with SDP could delay the austerity-focused approach to struggling Euro zone members, such as the third Greek bailout and the potential collapse of the €550 billion energy renovation. This, in turn, might halt the broader European recovery (read: 4 Outperforming ETFs Leading Europe Higher).

Market Impact

The election result suggests a huge level of confidence in the German Chancellor and her ways to handle European problems. There were mixed reactions to Merkel’s victory in the market as European markets opened lower initially on Monday while the euro gained against the dollar.

ETFs to Watch

Below, we have highlighted three European ETFs that would be in focus due to the German elections. Investors should closely monitor the movement in these funds in the coming days and catch an opportunity when it arises:

iShares MSCI Germany ETF (NYSEARCA:EWG)

This fund targets the German equity market by tracking the MSCI Germany Index and holds 54 securities in the basket. It is by far the largest and most popular German ETF with AUM of over $5.1 billion and average daily volume of 3.7 million shares. The fund has expense ratio of 0.50%.

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 Bayer, Siemens and BASF taking the top three spots and making up at least 8% of total assets each. EWG has gained over 15% in the year-to-date time frame.
 
CurrencyShares Euro Trust (NYSEARCA:FXE)

This fund appears a great way to play future rise in the Euro against the U.S. dollar. The ETF tracks the movement of the Euro relative to the U.S. dollar, net of the Trust expenses, which are expected to be paid from the interest earned on the deposited Euros (read: Bet on the Euro with These 3 ETFs).

The product managed assets worth $221.1 million so far and sees a good volume of 585,000 shares per day. The ETF charges 40 bps a year in fees and is up 2.19% in the year-to-date time frame.

PIMCO Germany Bond Index Fund (NYSEARCA:BUND)

This ETF is suitable for investors seeking broad exposure in both German corporates and treasury securities. The fund follows the BofA Merrill Lynch Diversified Germany Bond Index and has amassed $3.1 million in its asset base so far. It charges 45 bps in fees per year from investors and trades in paltry volume of less than 2,000 shares a day.

The product holds 46 securities in its basket with effective maturity of 5.1 1 years and effective duration of 4.54 years. The fund lost nearly 0.09% year-to-date and pays 0.96% in 30-Day SEC yield.

Bottom Line

While the victory of Angela Merkel is surely favorable for the German economy, challenges in forming a stable government remains a drag on the country’s short term outlook. Given how important Germany is to Europe, investors should definitely pay close attention to these proceedings in the days ahead, as talks of a stable coalition could definitely help to boost German—and indeed broad European—shares in the coming months.

This article is brought to you courtesy of Eric Dutram.


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