Merkel's Party Wins State Election: German ETF in Focus

The prospects of current German chancellor, Angela Merkel being re-elected in the September 24, 2017 elections, received a significant boost after her party won the state election in Saarland. The election was closely watched as a representation of her strength. The governor of Saarland, Annegret Kramp-Karrenbauer, who secured the win,  is often called ‘mini-Merkel’ due to her similar ideologies.

 

Merkel’s opponent Martin Schulz, leading the center-left Social Democrats, lost with 29.6% of the vote. Schulz, who seems to have increased his party’s appeal, asked his supporters not to lose hope ahead of the integral national election despite the loss in Saarland, a state with approximately 800,000 voters. 

 

However, this win does not guarantee a re-election for Merkel, as the state of Saarland is relatively smaller when compared to the overall 80 million strong population of Germany.

 

However, the margin of victory is definitely a shot in the arm for Merkel. Most polls indicate a win for her owing to her 12 years of experience in international leadership.

 

A key state to watch out for would be North-Rhine Westphalia, the most populated state in Germany with roughly 18 million people. It goes out to vote on May 14, 2017. Martin Schulz’ party seems to be leading in the opinion polls in this state. The outcome will represent people’s sentiments ahead of the national elections in September. 

 

Merkel’s popularity took a hit some time back owing to her take on the refugee program in Germany. Also, her inability to directly advance women has given Schulz a trump card as he wows to fill his cabinet with at least 50% women.

Overall, there is increased uncertainty regarding who will win the national elections in Germany. The recent victory surely marks a good start for Merkel’s party.

 

iShares Currency Hedged MSCI Germany ETF HEWG

 

This fund is an appropriate bet for investors looking to gain exposure to Germany without betting on the euro. There is high uncertainty regarding the future of the currency because of elections. Economists predict that if Marine Le Pen wins the elections in France, the euro could decline to a 15-year low. Therefore, we think it’s best to remain hedged to Euro for now (read: France ETF Hits New 52-Week High).

 

HEWG has AUM of $492.6 million and charges 53 basis points in fees per year. Consumer Discretionary, Materials, and Financials comprise more than 48% of the fund holdings. It returned 5.65% in the year-to-date time frame and 19.21% in the past one year (as of March 24, 2017). As such, HEWG currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Time to Buy Germany ETFs As Growth Hits Five-Year High?). 

 

We will now compare the performance of HEWG to a more broad-based currency hedged Eurozone ETF, HEDJ.

 

WisdomTree Europe Hedged Equity Fund HEDJ

 

This fund is an appropriate bet for investors looking to gain a diversified exposure to European equities without betting on the euro. 

 

HEDJ has AUM of $9.21 billion and charges 58 basis points in fees per year. Industrials, Consumer Discretionary, and Consumer Staples comprise more than 52% of the fund holdings. The fund has a 25.5% allocation to Germany, 24% to France, and 19.2% to Spain. It returned 8.07% in the year-to-date time frame and 19.86% in the past one year (as of March 24, 2017). As such, HEDJ currently has a Zacks ETF Rank #3 with a Medium risk outlook. 

 

Source: Yahoo Finance

 

Though the performance of both the funds in the past one year was relatively similar (HEDJ’s outperformance of 0.65%), the broader Eurozone ETF has significantly outperformed the Germany ETF in the year-to-date time frame. Therefore, it can be inferred that investors are eyeing diversified exposure to European equities, owing to the high political uncertainty in the region. The polls predict a neck and neck fight in Germany while Emmanuel Macron is expected to win the French elections comfortably against Le Pen in the second round on May 7, 2017 (read: Are European ETFs a Good Buy Amid Political Uncertainty?). 

 

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WISDMTR-I HE FD (HEDJ): ETF Research Reports
 
ISHA-CH MS GERM (HEWG): ETF Research Reports
 
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