S&P Bank Downgrades Could Hamper This ETF

ETF Trends

In a reminder that all still is not well in the Eurozone, Standard & Poor’s downgraded three major European banks Tuesday after the close of U.S. markets. That could be a near-term problem for the iShares MSCI Europe Financials ETF (EUFN) .

Citing increased risk, S&P lowered its ratings on Barcalys (BCS), Deutsche Bank (DB) and Credit Suisse to A from A+. The A rating is five levels into investment-grade territory. The ratings also cited larger regulatory initiatives and uncertain market conditions as reasons for the downgrades. News of the downgrades comes after EUFN has plunged 8.6% in the past month. [Deutsche Bank Slaps Europe Bank ETF]

S&P said Barclays, Credit Suisse, Deutsche Bank and UBS are among the most exposed in Europe to regulatory initiatives being undertaken globally on capital market-related businesses, including the Federal Reserve’s proposals on foreign banking organizations, reports Nathalie Tadena for MarketWatch.

The ratings agency affirmed its A rating on UBS (UBS). S&P has a stable outlook on all four European banking giants, but despite the stable outlook, the downgrades could sting the already vulnerable EUFN. UBS, Barclays and Deutsche Bank are among the ETF’s top-10 holdings. Factor in Credit Suisse and the quartet combines for over 13% of EUFN’s weight. [ETFs For an Improving Europe]

Despite its recent struggles, EUFN has been a stellar performer over the past year and investors have embraced the fund as European rebound play. Over the past 12 months, EUFN is up 27.2% and its assets under management total, now over $79 million, has nearly quadrupled since late April 2012.

Facing a harsh regulatory environment and slack economic growth in Europe could further pressure the banks S&P downgraded while leading to an uptick in volatility, according to the ratings agency.

Overall, it has already been a trying past few days for EUFN. Last week, the Bank of Spain told banks in that country to be careful with how much in dividends they payout because of the country’s tenuous economic outlook. Spain, the Eurozone’s fourth-largest economy, accounts for nearly 9% of EUFN’s country weight, according to iShares data.

iShares MSCI Europe Financials ETF

View photo



ETF Trends editorial team contributed to this report.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

View Comments (2)