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ETFs to Buy As German Economy Grows

Zacks Equity Research
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The German economy grew at an impressive pace in the fourth quarter of 2017, detailed data from Destatis showed. Germany is the biggest country in the 19-nation Eurozone bloc. Its economic condition reflects Eurozone’s economic scenario.

German economy has been benefiting from low unemployment and interest rates. Moreover, a global recovery in trade has been a positive for the export-dependent country.

Economic Data

Germany’s GDP increased 0.6% in the fourth quarter of 2017 compared with an upwardly revised 0.7% in the prior quarter. However, this expansion helped Germany register 2.2% growth in 2017, the highest since 2011 and above 1.9% witnessed in 2016.

Coming to drivers of economic growth, strong export demand primarily led to the increase in GDP. Exports rose 2.7% in the quarter compared with 1.8% in the prior quarter, whereas imports increased 2% in the same period. Strong economic fundamentals helped the economy register robust budget surplus in 2017. Although the surplus of 36.6 billion euros was lower than the initial estimate of 38.4 billion euros, it is still the highest budget surplus since German reunification in 1990.

Coming to joblessness, seasonally adjusted harmonised unemployment rate in December was 3.6%, below 3.7% registered in November and the lowest since October 1980. This indicates that Germany’s economy is on a strong growth track and is supportive of a positive outlook.

Currency and Political Risk

Germany’s economy faces risks from a rising euro, as it will hurt export demand. The CurrencyShares Euro ETF FXE, which measures the euro’s performance against the greenback, is up almost 15.2% in a year. However, events this week are expected to greatly impact the euro.

Germany has become prey to a lot of political uncertainty. In the German elections, Merkel secured her fourth term as the country’s chancellor but her party, the Christian Democratic Union (CDU), witnessed its worst results since 1949. German CDU’s vote on Feb 26 on whether or not to move ahead with the coalition with Social Democratic Party (SPD), Italy’s general election and SPD’s vote on the coalition on Mar 4 are expected to drive the euro this week.

However, the coalition deal is widely expected to go through. Latest poll by Insa showed the SPD gathering lower support than the far-right Alternative for Germany (AfD) party. Last week’s poll showed the AfD with 16% support compared with SPD’s 15.5% and CDU’s 32%. As a result, another election does not seem to be the right choice for SPD, a party already suffering from leadership turmoil after Martin Schulz stepping down as leader of the party.

Let us now discuss a few ETFs that are primarily focused on providing exposure to German equities (see all European equity ETFs here).

iShares MSCI Germany ETF EWG

This fund is an appropriate bet for those looking to gain exposure to large-cap companies in Germany.

EWG has AUM of $4.4 billion and charges 49 basis points in fees per year. Consumer Discretionary, Financials and Materials are the top three sectors of this fund, with 19.3%, 15.2% and 14.9% allocation, respectively (as of Feb 23, 2018). The top three holdings are Allianz, Siemens AG and SAP, with 7.1%, 7.0% and 6.9% exposure, respectively (as of Feb 23, 2018). EWG has returned 21.8% in a year. As such, EWG has a Zacks ETF Rank #1 (Strong Buy), with a Medium risk outlook.

First Trust Germany AlphaDEX Fund FGM

This fund seeks to provide exposure to German equities across market caps.

FGM has AUM of $274.0 million and charges 80 basis points in fees per year. Consumer Discretionary, Industrials and Materials are the top three sectors of this fund, with 24.6%, 20.4% and 16.0% allocation, respectively (as of Feb 23, 2018). From an individual holdings perspective, Wirecard AG, Salzgitter AG and Grand City Properties S.A. are the top three holdings of the fund, with 4.6%, 4.2% and 4.1% allocation, respectively (as of Feb 23, 2018). It has returned 36.4% in a year. As such, FGM has a Zacks ETF Rank #1, with a Medium risk outlook.

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CRYSHS-EURO TR (FXE): ETF Research Reports
 
ISHARS-GERMANY (EWG): ETF Research Reports
 
FT-GERMANY (FGM): ETF Research Reports
 
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