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Italy ETFs Plunge on Deepening Political Chaos

Sweta Killa
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Italy has been in the spotlight since its election on Mar 4 that has led to a hung parliament, with no major political group being able to form the majority. This has left the euro zone's third-largest economy without a government. Now, the latest news out of Italy has escalated the ongoing political crisis.

This is especially true as an effort to form the first populist government in Western Europe has collapsed after president Sergio Mattarella rejected the choice of a euro-skeptic as finance minister, which could provoke "Italy's exiting of the euro.” The leader of the two parties — anti-establishment Five Star Movement and the far-right League — were in talks to form a coalition for weeks (read: Negative News Flow Puts Eurozone ETFs in Focus).

The move has led to calls for Mattarella’s impeachment. Thus, a former International Monetary Fund economist Carlo Cottarelli was officially appointed as an interim prime minister in a bid to restore political order and end an 11-week deadlock after inconclusive national elections. Cottarelli might hold elections in autumn or early next year.

The likelihood of another election reignited fears of a populist rise in Europe once again. Market participants fear that another election campaign could focus on Rome's continued membership of European institutions. The election will likely resemble a referendum, de facto, on the European Union and the euro. Per the Frankfurt-based Sentix research group, a gauge measuring the likelihood of Italy leaving the single currency bloc within the next 12 months jumped to 11.3% from 3.6% in April.

The latest polls also show that the far-right League has gained support since winning 17% of the vote in inconclusive Mar 4 elections, climbing as high as 24%. The Five Star has been drawing about the same 32% it got two months ago.

Market Impact

Italy’s FTSE MIB index dropped nearly 2% on May 28 to its lowest level since early March after tumbling 4.5% last week. FTSE Italia All-Share Banks Sector Index, which acts as a proxy for political risk due to their big government bond holdings stole the show, plunging 4.1% on the day -- the biggest one-day drop since Feb 2017. In particular, Banca Monte dei Paschi di Siena led declines with a drop of as much as 7.8% (see: all the Europe Equity ETFs here).

Meanwhile, the yield on Italy 10-year sovereign bonds surged to over 2.60%, the highest in nearly four years.

iShares MSCI Italy ETF EWI

This fund offers exposure to a broad range of companies in Italy by tracking the MSCI Italy 25/50 Index and holding 24 stocks in its basket. It is heavily concentrated on the top four firms with a combined 42.8% share while other securities hold less than 5% of total assets. Further, about 33.2% of the fund’s portfolio is allotted to financials while energy, utilities, consumer discretionary and industrials round off the top five with a double-digit exposure each. The fund has AUM of $557.8 million and trades in heavy volume of more than 1.1 million shares a day on average. It charges 49 bps in annual fees and has shed about 4.3% in a week. The product carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares Currency Hedged MSCI Italy ETF HEWI

This ETF seeks to reduce the impact of the euro relative to the U.S. dollar on Italian allocation. The fund follows the MSCI Italy 25/50 100% Hedged to USD Index and is a play on the unhedged fund (EWI) with a hedge to strip out the euro currency exposure. It has amassed $3.5 million in its asset base and trades in a paltry volume of 2,000 shares a day. The fund charges 49 bps in annual fees from investors and has lost 3.3% over the past week. It has a Zacks ETF Rank #3 with a High risk outlook (read: Top-Performing ETF Areas of April).

Franklin FTSE Italy ETF FLIY

This fund provides exposure to large- and mid-sized companies in Italy and follows the FTSE Italy Capped Index. Holding 39 stocks in its basket, it is heavily concentrated on the top four firms that collectively make up for 40.2% share. Others hold no more than 5.61% of assets. From a sector look, financials take the largest share at 35.3% followed by energy (18.7%), consumer discretionary (15.6%) and utilities (14%). The product is unpopular with AUM of $2.5 million and average trading volume of 2,000 shares. It charges 9 bps in annual fees and has plunged 5.7% in a week.  

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