It seems that 2014 is the year for the so-called PIIGS group of nations, outperforming other European markets. The countries - Portugal, Ireland, Italy, Greece and Spain – were deemed as the Euro zone’s most troubled economies and are back in favor thanks to improving fundamentals.
In fact, most of the PIIGS nations are witnessing falling government bond yields. This means investors are gaining faith in the region’s most distressed group of nations (read: 3 ETFs Crushing Eurozone Competition).
Despite the huge debt burden and a high level of unemployment, these markets are considered to be cheaper than the more stable European economies in terms of valuations.
The PIIGS have been the best performers among Europe ETFs this year. All the ETFs tracking the PIIGS nations have delivered positive returns, clearly outperforming the largest and the most popular European ETF – FTSE Europe ETF (VGK) – which has delivered flat-to-negative returns since the start of the year. Excluding Spain, the PIIGS ETFs have delivered above 6% so far this year.
As such, these ETFs are witnessing strong capital inflows and can be a great bet over the long term. Below we have highlighted five ETFs, each tracking a PIIGS nation, in greater detail for investors seeking to make a bet on the space:
Portugal: Global X FTSE Portugal 20 ETF (PGAL)
After facing the worst recession crisis since the 1970s, the Portuguese economy finally managed to emerge from recession during the second quarter of 2013 and is now showing signs of revival. Rising consumer confidence and demand, booming exports and declining unemployment are all playing a key role in bringing the economy back on track.
Most importantly, the country has smartly been able to manage its external trade balance. After having a deficit of 10% of GDP in 2010, Portugal’s current account recorded a surplus of 0.5% in 2013. Its economy grew at 0.6% during the final three months of 2013, up from the 0.3% expansion witnessed during the third quarter of 2013.
Moreover, the country’s government has revised its GDP forecast for 2014 to 1.2% from its earlier forecast of 0.8%. Also, the jobless rate is expected to fall to 15.7% from 16.3% in 20103.
The recently launched Portugal ETF has been among the best performing in the European equity space in the year-to-date time frame, returning 12.2%. The fund tracks the FTSE Portugal 20 Index and holds a small basket of 20 stocks (read: 2014: The Year of the Portugal ETF?).
Energias De Portugal occupies the top spot with around 20% of the fund’s total assets, followed by Galp Energia (13.11%) and Jeronimo Martins (10.98%). Sector-wise, the fund is heavily weighted towards utilities (24.39%) and consumer staples (19.35%), followed by financials. The fund charges 55 basis points as fees per year.
Italy: iShares MSCI Italy Index Fund (EWI)
In spite of the mounting debt burden and steep high unemployment, the Italian economy managed to grow at a modest pace of 0.1% in the last quarter of 2013.
The country’s new prime minister has vowed to tackle the problem of double-digit unemployment and has most recently announced a package of tax cuts. These tax cuts are expected to spur investment and consumption, thereby improving Italy’s GDP.
The Italy ETF is the second best performing fund in the PIIGS group and has retuned 8.4% so far this year. The fund manages an asset base of $1.2 billion and tracks the MSCI Italy 25/50 Index.
ENI SPA is the only stock in the fund having double-digit allocation. Also, the top ten stocks form 65.7% of total assets, suggesting concentration risks. Furthermore, financials and energy sectors alone form more than 50% of total assets, suggesting concentrations risks on this front as well.
Ireland: iShares MSCI Ireland Capped ETF (EIRL)
Ireland was the first Euro area nation to come out of the three-year bailout program in December last year. Rising consumer sentiment and upbeat manufacturing sector data are some of the factors for the handsome returns from this country ETF. Unemployment dropped to the lowest level in almost five years to 11.9% in February from 12% in January and 13.8% in the year-ago period.
The fund seeks to match the performance and yield of MSCI All Ireland Capped Index. The fund holds a small basket of 24 stocks and the top holding – Crh Plc – alone comprises a little under one-fourth of the total fund assets. Sector-wise, materials and consumer staples combine to make up 50% of the total fund assets.
The fund has returned 7% this year, while returning 39% in 2013. The fund currently has a Zacks ETF Rank #2 or Buy rating, indicating that it is expected to outperform broader markets in the near term (read: Buy Ireland ETF for a Green Portfolio on St Patrick's Day).
Greece: Global X FTSE Greece 20 ETF (GREK)
Strong export of goods and services enabled Greece to clock a high current account surplus of 2% last year. This figure is believed to be the first recorded in quite some time for Greece (read: 3 Country ETFs Hitting 52 Week Highs).
Also, other data including retail sales, car sales, industrial output, construction and manufacturing activity (PMI.V) indicate that the economy has probably bottomed out and is expected to move out of recession this year.
The fund seeks to give exposure to Greek stocks by tracking the FTSE/ATHEX Custom Capped Index. The fund has returned 7% since the start of the year and is up 39% in the past one year. The fund currently has a Zacks ETF Rank #2 or Buy rating, indicating that it is expected to outperform broader markets in the near term.
Spain: iShares MSCI Spain Capped ETF (EWP)
The Spanish economy is expected to grow at 1.7% this year, better than the contraction of 1.2% witnessed last year. Unemployment is also expected to show a declining trend and is expected to fall from 26.4% last year to 25.7% this year and to 24.6% by the end of 2015.
Spain can be played with EWP, an ETF that primarily invests in large and mid-cap Spanish stocks. Two of its top three financial holdings – Banco Santander and BBVA –account for 33% of its total assets. Sector-wise, financials dominates the fund holding 47% of total assets.
The fund returned 34.26% in 2013 and is up 1.89% in the year-to-date frame.
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