Inside the Greece ETF

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After six years of recession and three years after bailout, the Greek economy is finally showing some level of growth in 2014. In return for its international bailout, Greece has imposed several rounds of stringent austerity measures, including sweeping spending cuts and a series of tax hikes, in an effort to reform its economy.

Since the recession, the country whose growth contracted more than 20% is finally expected to see a contraction of just 4.2% in 2013 and a modest growth in 2014. It appears that optimism in the euro zone along with a strong tourism season will result in an improvement of the country’s GDP (Has the Euro ETF Bottomed Out?).

The country is expected to return to financial market next year as it continuously strives to fix its public finances. The debt restructuring program by the government led to a huge reduction in interest cost on debt.

Moreover, the region for the first time after the disaster expects to see a budget surplus by the end of the year. With production level becoming stable, it can be said that the country may soon bottom out.

Also, banks of the region appear to be in a better position going forward. Their recapitalization, which became essential because of heavy losses on their holdings of Greek government bonds in last year’s debt restructuring, is now being completed.

The provision of up to €50 billion ($65 billion) from the bailout funds should both make up for these losses and leave them able to withstand a further souring in their private loans, 25% of which are already non-performing (Bet on the Euro with These 3 ETFs).

In fact, the region was recently granted a fresh round of austerity measure after the first review made by the so-called "troika" comprising the European Commission, the International Monetary Fund and the European Central Bank.

On the progress made by the region, the troika agreed that more bailout funds, which so far totalled about €200 billion, or about $260 billion, will be disbursed to the region. And if Athens continues with its progress then the euro zone may further ease its debt load by cutting the interest rate and increasing the maturities of official loans.

Also, ratings agency Fitch recently upgraded its sovereign credit rating for Greece by one notch, attributable to the continuous progress made by it in cutting down its budget deficit. This resulted in bond yields reaching a three-year low and the stock market reaching a two-year high.

However, the country still remains the victim of a high level of unemployment. The jobless rate has reached 27.2%. But the economy expects the rate to fall if not immediately but by the end of next year.

Also, the political situation of the region remains weak and revenues remain below target as a result of the continued failure to crack down on tax evasion. Also, external shocks may dampen the outlook of the region (Play Europe with This ETF Pair Trade).

ETF to Watch

With Greece on the verge of turning the corner, it appears that investors are becoming optimistic about the country. In fact, the ETF tracking the region, Global X FTSE Greece 20 ETF (GREK), which turned out to be the worst performer in 2012, is seemingly gaining traction. The ETF has experienced a huge inflow of assets in the past two weeks.

With crisis over the Greek economy dissipating along with the worries of its exit from the euro zone and data on the economy becoming more optimistic, it seems that the ETF is gaining momentum after a terrible performance for most of 2013 so far.

Despite the problems looming over the country, GREK has actually gained 15.85% year to date. In fact, its return is just marginally below the broader market fund, SPDR S&P 500 (SPY). The last few trading sessions have gone in favour of the ETF leading to a reversal in trend in its performance (Big Gains in Greece ETF, Can It Last?).

GREK, which manages an asset base of $42 million, is home to a small basket of 24 companies. The fund charges a fee of 65 basis points on an annual basis.

However, it should be noted that the ETF has a significant exposure in the consumer staples and consumer discretionary sectors of the region. Both account for about 40% of the asset base. This may act against the performance of the ETF as the region still faces a high level of unemployment.

However, the positive development in banks may positively impact the ETF as financials occupies the third position in the fund with an asset share of 14.8% (Three Great ETFs for Your IRA).

Bottom Line

Although the Greek economy is showing some signs of stability it has a long way to go. Shares of the region still appear to be at depressed levels and a lot need to be done to actually allure investors’ attention. Currently we 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.

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