The iShares MSCI Europe Financials ETF (NASDAQ: EUFN) is down just over 1 percent year-to-date. While it's not alarming decline by any mean, it's a broad view: a more focused look at EUFN reveals the exchange traded fund resides about 11 percent below the 52-week high it set in February.
EUNF is more than 11 percent below its 200-day moving average. Several other factors point to more potential downside for EUFN, which tracks the MSCI Europe Financials Index.
The $2.13-billion EUFN holds 83 stocks, with HSBC Holdings Plc (NYSE: HBC) accounting for more than 10 percent of the fund's weight. None of EUFN's other holdings command weights of more than 5.18 percent.
At the geographic level, EUFN is top-heavy, with the U.K. representing over 30 percent of the fund's roster. Switzerland, France and Germany combine for almost 34 percent of EUFN's geographic exposure.
Why It's Important
“A key question is: why are European banks weakening, given the weakness in the euro exchange rate is a tailwind for broad European equities [and] Europe is an export region?” Rareview Macro founder Neil Azous said in a Monday note.
Some marquee economic data points could test EUFN in the near-term, which is a point to ponder for investors, as some recent data releases out of the Eurozone have been disappointing.
“Secondly, the Eurozone economic data surprise index closed last Friday at negative 91.7,” said Azous. “The 50-day moving average, effectively duration weighting the data, is negative 73.21, also the lowest since 2011 when it bottomed at negative 80.71.”
The challenges facing EUFN may indicate the ETF will be challenged to deliver compelling risk-reward for investors. EUFN's three-year standard deviation is 18.23 percent, or more than 500 basis points above the same metric on the iShares U.S. Financials ETF (NYSE: IYF).
The key point here is that further weakness in the financial sector could lead to broader European equity weakness,” said Azous. “A second question is if the financial sector leads broader European equities lower, would other markets follow, including the U.S.?”
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