Why The iShares MSCI Spain Capped Index Fund ETF Is On My Radar (EWP)

spainEric Dutram: The outlook for the euro zone looks volatile with the political gridlock in Italy and the rising euro hurting competitiveness. The situation has worsened with fiscal tightening and increasing unemployment restricting domestic consumption in the region.

Spain, the fourth-largest region in the Eurozone, showed signs of falling into a recession during the final quarter of last year. The economy shrank by 1.3% in 2012, putting Spain’s plan to push down the budget deficit in jeopardy.

According to the International Monetary Fund (IMF), the economy is expected to contract again this year by 1.4% on the back of lagging business and consumer confidence. The intolerably high unemployment rate of 26% and harsh government austerity remain the major threats to the country’s economic growth.

However, these concerns could fade with the expected pick-up in economic activity in the second half of the year and the recent stimulus measures to spur financing for small businesses and reduce youth unemployment (read: More Trouble Ahead for Italy and Spain ETFs?). Spain is currently considering spending cuts and tax hikes that would save €150 billion ($194 billion) by 2014.

Further, Spanish 10-year government bond yields have fallen by about 150 bps over the past six months and are now holding steady above the 5% mark. This is much below the 52-week high for this benchmark and investors are somewhat relieved as a fall in these bond yields could boost growth in the Spanish economy going forward.

For those buying into this optimism, investors should focus on the only pure play – the iShares MSCI Spain Index Fund (NYSEARCA:EWP) which tracks the MSCI Spain 25/50 Index – to target the country.

The product added over 13% over the trailing six months, indicating a huge reversal in the trend from the first half of 2012, which was deep in red. This suggests the strong positive shift in the momentum of the European outlook heading into 2013.

Though the Spain ETF lost around 0.5% in the first two months of the year, it is leading the broader European funds significantly. The product has outperformed the most popular iShares MSCI EMU Index Fund (EZU) by 210 bps, iShares MSCI Germany Index Fund (EWG) by 90 bps, iShares MSCI Italy Index Fund (EWI) by 850 bps and iShares MSCI France Index Fund (EWQ) by 180 bps.

This remarkable performance has been brought up by its holdings breakdown which is heavily skewed towards financial securities. The fund has nearly 41% of the assets in the sector, which is leading the overall market in 2013 owing to strong performance by the banking stocks (read:What is Driving Bank ETFs Higher?).

Beyond this segment, utilities, industrials and telecom make up for another 40% of the combined share, making semblance of safety in the product.

Holding 24 securities, the ETF puts about 70% in the top 10 firms. This ensures heavy concentration and increases the company-specific risks. Also, the return of the fund is highly dependent on the returns of the top 10 firms. Banco Santander, Telefonica (TEF) and Banco Bilbao (BBVA) occupy the top three positions in the basket.

The ETF focuses on the large cap segment that accounts for 69% of EWP, while mid cap takes the rest with just 1% going to small caps. In terms of style exposure, the product has a tilt towards value stocks, ensuring more safety to investors.

Apart from fundamentals, let us take a technical look at the chart for the Spain ETF and its trends:

From the above chart, investors should note that the ETF has been on the rise from the second half of 2012 with certain dips in November. This positive trend was seen again in January 2013 but could not be sustained in February. The product is highly volatile as indicated by its annualized standard deviation of 33.50%.

Currently, EWP is showing weakness on the price front. The meeting of the 9 and 50 EMA lines with the current price might reverse this trend as the fund is already trading above its 200 EMA (see more ETFs in the Zacks ETF Center).

Additionally, the fund is trading near its resistance level of $30. Crossing this level will show a clear strong uptrend. It has also witnessed a bullish breakout accompanied by very high volumes of nearly 480,000 shares per day on average. Thanks to its extreme liquidity, investors do not have to pay an additional cost beyond the expense ratio of 0.51%.

Given this, investors with a high risk tolerance and desire for more income could find EWP to be an interesting play. The ETF has been beaten down and the high yield could compensate for the extreme volatility in the product.

Just remember that the overall outlook for Spain is still quite negative and that some more pain could be in store for this nation. This could be especially true if Spain’s own political issues spiral out of control, or if other problems materialize in the debt debate.

For this reason, the longer term outlook still isn’t very positive for EWP. The country still has a host of problems and any of its funds are likely to have significant trouble.

That is why this fund may bounce back in the short-term, but in the long-run, we are maintaining our Zacks ETF Rank of 4 or ‘Sell’ on EWP. So adventurous investors may want to consider nibbling on EWP here, but those with an outlook of more than few months should still shy away from this uncertain economy.

This article is brought to you courtesy of Eric Dutram From Zacks.

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