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High-Performing Italy ETF Looks For An Encore In 2018

ETF Professor

The iShares MSCI Italy ETF (NYSE: EWI), the largest U.S.-listed exchange traded fund dedicated to Italian equities, jumped 28.5 percent last year, making it one of the best-performing single-country developed markets ETFs.

Along the way, EWI outperformed the comparable Germany and Spain ETFs while slightly trailing the iShares MSCI France ETF (NYSE: EWQ). With 2018 starting, debate is swirling regarding the ability of Italian stocks to outperform regional rivals while offering up anything resembling a sequel to 2017's impressive showing.

“An election this year will keep investors guessing whether Italian equities can continue a rally that made them the best performers among major euro-area benchmarks in 2017,” reports Bloomberg. “The FTSE MIB Index climbed almost 14 percent last year, the most since 2013, as concern eased about stability in the country’s banking sector. Italy will hold national elections in March, a vote that could lead to a hung parliament and a period of political turbulence.” 

Volatile Political History

Among developed markets, Italy is one of the most politically volatile, seemingly changing regimes every two years or so for the better part of five or six decades. With that history in mind, some investors are understandably pensive about Italian stocks in an election year.

For its part, EWI is also volatile relative to other single-country developed markets ETFs. The fund has a three-year standard deviation of 18.7 percent. That is well above the comparable metrics on the equivalent France and Germany ETFs. The S&P Europe 350 Index has a three-year standard deviation of just under 13 percent.

Italy's elections must be held by late May and Italian stocks came under pressure late last month amid rumors that national elections could be bumped up to March.

Bank Concerns

How the country's elections affect Italian banks is critical to EWI's price action because the ETF allocates almost 34 percent of its weight to once-controversial Italian banks. That is nearly double the ETF's second-largest sector weight, which is energy.

“Concerns that stricter rules from the European Central Bank will hit Italian lenders, which are still struggling under piles of soured debt, have weighed on the shares of Italian financial companies in the last quarter of the year, a trend that may persist until more clarity on the measures emerges,” according to Bloomberg.

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