Big Gains in Greece ETF, Can It Last?

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Although other European markets have taken over the limelight, the situation in Greece should still be of concern to investors. The country remains highly indebted, has a troubling unemployment rate, and has little prospects for growth in the near future.

Thanks to these worries and the Cyprus crisis, shares of the only Greek ETF on the market, GREK, have been terrible performers so far in 2013. GREK has actually declined by about 20% on the year, a sluggish performance when compared to broad market funds like VGK (flat on the year), or even other weak nations like Spain (EWP: -5% YTD) or Italy (EWI: -12% YTD).

Still, the country’s ETF appears to have bottomed out in recent sessions, and has managed to stay relatively rangebound in the past few days of trading. Then, during Tuesday’s session the ETF surged higher on some fresh news, catapulting shares higher by 7% in mid-day trading (read Do Corrupt Countries Make for Great ETFs?).

What Happened to GREK?

This massive reversal shakes the trend in the Greece ETF, at least for the time being. Shares of the country’s biggest banks moved sharply higher on hopes that they could find a way to recapitalize—beyond merging—and avoid nationalization.

Apparently, many are optimistic on these prospects, as shares of Eurobank and National Bank of Greece have rebounded in recent trading. This has been great news for GREK as well, as the ETF holds a decent stake in the National Bank of Greece, while many other non-financial securities have been buoyed by the recent bout of optimism in the marketplace as well (see Has the Euro ETF Bottomed Out?).

Is this possible?

Still, the chances of a favorable end to this situation aren’t guaranteed by any means. Both of the banks will have to raise billions in fresh capital and it remains to be seen who will be willing to invest in either firm.

This is especially true after the recent Cyprus troubles and given that the ‘troika’ froze the merger between these two on Monday. Issuing convertibles and share capital increases have been floated by Eurobank, but other investors will be needed to shore up the capital position.

Overall, it looks to be a difficult time for Greek banks yet again, and some investors may be jumping the gun on bottom fishing in the market. Financials make up just 16% of GREK, so while they are obviously important to the returns of the fund and the country’s current economic issues, they aren’t drivers of equities at this time (see Play Europe with This ETF Pair Trade).

Instead, investors need to consider the consumer space in this ETF, as the two sectors—discretionary and staples—make up nearly 42% of the total portfolio. These securities are really the key for the ETF, especially considering that the two banks combine to make up less than 6% of total assets in GREK.

Bottom Line

Investors should also remember that GREK has been beaten down severely so far in 2013, so a bit of a move higher was probably long overdue. This is particularly true when looking at other weak markets in the region, any of which have seen better Q1s than GREK.

Lastly, our models currently have GREK with a Zacks ETF Rank of 4 or ‘Sell’. This suggests that the longer-term picture is still very weak for this fund, and that it is best not to be fooled by this recent surge in Greek shares (read 4 Best ETF Strategies for 2013).

Greece still has a long way to go to get back to some semblance of normalcy, and its shares (and outlook) are still quite depressed. It is probably far better to look to other markets in Europe—or at least broader funds—for exposure, rather than taking a risk on an unlikely rally continuing in Greek shares here in Q2.

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