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Bond Market Highlights Portugal ETF's Struggles

ETF Professor

The Global X FTSE Portugal 20 ETF (NYSE: PGAL), the lone exchange-traded fund dedicated to Portuguese stocks, is down four percent year-to-date. While that performance puts PGAL ahead of some well-known broad eurozone ETFs, the Portugal ETF could be doing better.

Struggling Financials Weighing On PGAL?

The struggles of Portuguese sovereign bonds underscore those of PGAL. Not only are comparable Italian and Spanish bonds outperforming Portuguese debt, but credit default swap spreads are widening on debt issued by Lisbon.

“Falling government bond yields across Europe have meant investors have been rewarded with impressive returns so far this year. One country however, continues to lag. Portugal has seen its credit risk hover at elevated levels and its government bonds have produced negative returns this year,” said Markit in a new research note.

Related Link: Maybe Some Relief For The Spain ETF

The European Central Bank's rendition of quantitative easing, unveiled earlier this year, has reportedly been a boon for commercial real estate deals in Portugal and Spain.

However, PGAL's response to that theme is muted because, unlike many single-country ETFs, PGAL's financial services exposure is not large. Financials are merely PGAL's fifth-largest sector allocation at a weight of 8.4 percent.

Safe Haven

In theory, PGAL should be something of a safe destination because the ETF devotes a combined 43.2 percent of its weight to utilities and consumer staples stocks. However, those sector weights do little to damp PGAL's volatility, which on an annualized basis, is 22.4 percent, according to issuer data.

“Credit investors have been treating Portugal with increasing scepticism since the beginning of the year. Portugal’s five-year CDS spread, a measure of perceived credit risk, is 69 percent wider than at the start of the year according to Markit’s CDS pricing service.

"Compared to its European peers, Portugal’s five-year CDS spread is 2.75 times wider than Spain’s, after being less than double at the start of the year, and is also currently twice as wide as Italy’s spread,” according to Markit.

Even amid the bond market controversy, PGAL has managed to handily outperform equivalent Italy and Spain ETFs this year.

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