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2014: The Year of the Portugal ETF?

Zacks Equity Research

The European economy finally heaved a sigh of relief last year, with gains of about 25% for the SPDR EURO STOXX 50 (FEZ) and 20% for the SPDR STOXX Europe 50 (FEU). The main driver of this uptrend was Euro zone’s emergence from the acute debt-trap.
While all eyes remained on big names like Germany and France, investors should note that the PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries, often considered the weakest members in the Euro zone, have been seeing big gains too (read: Why PIIGS ETFs Are Outperforming).
Among the pack, the ETF industry had pure plays on each of the nations for quite some time except Portugal which debuted in the market just two months back in the form of FTSE Portugal 20 ETF (PGAL).
PGAL’s debut was well accepted as it added 8.05% in the last one month, performing better than the broader European fund Vanguard FTSE Europe ETF‘s (VGK) 3.74% return and SPDR S&P 500 ETF’s (SPY) return of 1.73%.
Notably, PGAL’s return breezed past a handful of single-country Euro zone ETFs in the said time-period as the ETF dedicated to Germany – iShares MSCI Germany (EWG) – added 2.75%, Global X FTSE Greece 20 ETF (GREK) gained 6.64% and iShares MSCI Italy Capped ETF (EWI) returned 7.31%. Only iShares MSCI Spain Capped ETF (EWP) became was able to beat PGAL marginally by adding 8.39% (read: Is a Great Year Ahead for the Spain ETF?).
Why the interest in this new PIIGS ETF?
After struggling for more than two years, the Portugal economy returned to the growth path in the second quarter of 2013. Declining unemployment, a lower trade deficit and rising consumer confidence all are playing their role in pulling up the nation from the debt debacle.
The part which caught investor eyes is the improving debt picture of the once debt-ridden Portugal. The recent uptrend in PGAL can be attributed to the Portuguese government’s ability to auction $4.4 billion in bonds effectively. This was Portugal’s first sovereign debt sale in eight months.

Portugal’s borrowing costs plunged to the lowest level since the start of Euro zone debt crisis in 2009. As per data from Bloomberg, the average yield investors demand to hold bonds from Greece, Ireland, Italy, Portugal and Spain fell to 161 basis points, the lowest since April 2010. This means investors are gaining faith on the region’s most distressed asset class.

As per the European Commission, Portugal’s gross public debt as a percentage of GDP will decline to 126.7% in 2014 and 125.7% in 2015 from the high point of 127.8% recorded in 2013. Real GDP growth will likely be 0.8% for 2014 and 1.5% for 2015 indicating marked improvement from the decline of 1.8% in 2013 and 3.2% in 2012.

Net exports are expected to be the source of the potential growth while domestic demand is likely to contribute meaningfully in 2014. However, the joblessness rate is not expected drop before 2015.

Portugal ETF in Focus
Despite the solid start, the fund hasn’t garnered a whole lot of investor interest by accumulating about $3 million in AUM since inception. The ETF charges a little higher in fees per year of 61 bps.
The product looks to track the performance of the FTSE Portugal 20 Index, holding 20 Portuguese stocks in its basket. The index focuses on the biggest stocks in the nation (or those that primarily derive their revenues from the country), screening by liquidity and market capitalization (read: Global X Launches First Portugal ETF (PGAL)).

The fund is heavily concentrated on the top firm – Energias De Portugal – at about18% of total assets, closely followed by Gulp Energia and Jeronimo Martins at 14% and 12.5% respectively.
From a sector perspective, utilities and consumer services dominate the fund’s portfolio at nearly 26% and 23%, respectively, indicating that the ETF might not be too volatile due to higher allocations to defensive sectors (see: all the European ETFs here).
Bottom Line
With European stocks roaming around at six-year high levels, major banking organizations have predicted that the limelight will be particularly on Europe in 2014 pushing aside the U.S. equities.
Amid such a bullish backdrop, risk-tolerant investors might bet on the Portugal ETF taking a cue from its all-important improved debt market and consider PGAL as a strong play this year (read: Ride Europe Higher with This Top Ranked ETF).
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