U.S. Markets close in 2 hrs 37 mins

Are European ETFs a Good Buy Amid Political Uncertainty?

Zacks Equity Research

Year 2016 was marked by surprises, as we saw three massive global political upsets. The Brexit mandate started the trend, followed by Republican nominee Donald Trump’s win in the U.S. elections against all odds, and finally the Italy referendum that led to the resignation of Prime Minister Matteo Renzi, Many believe that 2017 will also be marked by uncertainty.

With elections in major European nations due, the potential impact of these political events on the economy will keep investors concerned.  (Read: 3 Reasons to Buy Eurozone ETFs Now)

The Netherlands

Elections are slated to be held on March 15. The current government is a coalition of the People's Party for Freedom and Democracy (VVD), the Democrats (D66) and the Labour (PvdA) parties.          

The right-wing Party for Freedom (PVV) is led by Geert Wilders. He has promised that if he gets into power, the Netherlands would close its borders, shut down mosques and exit from EU. On the basis of recent opinion polls, it will take at least four parties to form a stable Dutch coalition. It is likely that a long period of uncertainty will prevail when the new government is formed. However, this is relatively common in the Netherlands and should have little market impact.

France

The first round of the 2017 French presidential election is due to be held on April 23, 2017. In case, no candidate wins a majority, a second round between the top two candidates will be held on May 7, 2017. The rise in populist policies in the world is apparent. Marine Le Pen winning the French presidential election in May 2017 will be a massive shock in post-war European politics. A referendum on France’s EU membership is likely to follow Le Pen’s victory.

Le Pen, who was earlier lagging behind in the polls, seems to have picked up after the controversy surrounding her  center right opponent Francois Fillon regarding a supposed illicit payment to his wife.

Germany

Three left leaning German parties could collectively win enough seats to oust the current Chancellor, Angela Merkel according to recent polls.

The chancellor’s decision to open borders to a great number of refugees seems to have not gone down well with the rising tide of global populism.  As a result of this, she faced massive criticism and nationwide protests. Despite the criticism she faced, opinion polls still show her in the lead. The uncertainty will probably be resolved only on September 24, 2017 when the elections are held.

 

 

 

Here are the ETF’s to watch out for, with a major holding in these regions (read: 3 Reasons Why These European ETFs Compelling Bets Now):

 iShares MSCI EMU ETF(EZU):

This ETF tracks the MSCI EMU index and offers exposure to the equity markets of a majority of European countries. It is heavily invested in France and Germany with an exposure of nearly 30% to each. Netherlands occupies the fourth spot with a 9% allocation. The fund manages an AUM of $7.28 billion and charges a fee of 50 bps a year. With 250 holdings, this fund is mostly large cap centric. It has a volume of around 5.52 million and returned 2.14% in the year-to-date time frame (as on February 22, 2017). The fund currently has a Zacks Rank #3 (Hold) with a Medium risk outlook.

SPDR Euro STOXX 50 ETF (FEZ):

This ETF tracks the EURO STOXX 50 Index and offers exposure to the economies of the Euro zone, a sub-set of general European equity exposure. It is heavily invested in France and Germany with an exposure of nearly 36% to France and 34% to Germany. Netherlands occupies the fourth spot with a 7% allocation. The fund manages an AUM of $2.3 billion and charges a fee of 29 bps a year. With 54 holdings, this fund is mostly large cap centric. It has a volume of around 3 million and returned 2.63% in the year-to-date time frame (as on February 22, 2017). The fund currently has a Zacks Rank #3 (Hold) with a Medium risk outlook.

Deutsche X-trackers MSCI Eurozone Hedged Equity ETF (DBEZ):

This ETF tracks the MSCI EMU IMI U.S. Dollar Hedged Index and offers investors purer access to Eurozone equities while seeking to mitigate exposure to currency fluctuations between the U.S. dollar and the euro. Considering the recent hike in interest rates by the Federal Reserve and ECB’s accommodative policies, it might so happen that the US dollar strengthens against the Euro. Hence, a currency hedged ETF is a good bet (read: Yellen Gives Hawkish Signals: 5 ETF Plays).

The fund is heavily invested in France and Germany with an exposure of nearly 30% to each. Netherlands occupies the fourth spot with an 8% allocation. The fund manages an AUM of $45.6 million and charges a fee of 45 bps a year. The fund has 664 holdings. However, it has approximately 20% allocated to its top 10 holdings. This fund is mostly large cap centric. It has a volume of around 5440 and returned 2.87% in the year-to-date time frame (as on February 22, 2017). The fund currently has a Zacks Rank #3 (Hold) with a Medium risk outlook.

Bottom Line

All said, uncertainties are prevailing around these country ETFs. If the Populist Party comes in power, we might see several Brexit-like incidents. So, it is better for investors to stay on the sidelines at the current level.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
ISHARS-EMU IDX (EZU): ETF Research Reports
 
DEUTS-XT MS EMU (DBEZ): ETF Research Reports
 
SPDR-EU STX 50 (FEZ): ETF Research Reports
 
To read this article on Zacks.com click here.
 
Zacks Investment Research
 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report