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Is Italy Headed the Way of Greece? ETFs in Focus

Zacks Equity Research

Italian banks received a push on signs that the government may intervene to support its financial sector. The country’s government announced that it has asked parliament to let it borrow as much as €20 billion (around $21 billion) for a potential rescue plan for troubled banks.

Investors should note that Italy is the Euro zone's third-largest economy and is heavily debt ridden. The country’s largest bank, UniCredit, is looking to raise €13 billion (around $13.5 billion) and cut jobs. Other banks Monte dei Paschi di Siena are also working to raise funds. These lenders have non-performing assets worth more than $370 billion (read: What Does Italy Referendum Mean for These ETFs?).

Meanwhile, Moody’s has called Italy’s banks among the 10 weakest globally and cut its outlook for the country’s financial institutions to negative from stable. In the agency’s stress tests, Italians banks performed worse than their counterparts in Portugal, Spain and Ireland, pulled down by high level of bad loans and a high cost-to-income ratio.

Thus, Italy seems to be walking in the footsteps of Greece owing to its mounting debts. Italy's debt already stands at 136% of the country's GDP, second only to Greece in the EU. Greece’s financial condition has been in the limelight time and again. Last year, the country was on the brink of a default only to be saved by a multi-billion-dollar bailout by the EU and IMF. This allowed the country to avoid bankruptcy and stay in the Euro zone.  

Banks in Italy received a blow as a result of the resignation of the country’s prime minister Matteo Renzi, after his program of constitutional reform was rejected by Italians in a referendum. With this, market watchers expect political uncertainty and the likelihood of an early election in Italy. The No movement was led by the anti-establishment Five Star Movement party, commanded by Beppe Grillo. If Grillo wins in an early election, he might dump euro, reintroduce the Italian lira and call for a situation like Brexit (read: European ETFs Fall Out of Investor Favor Since Brexit).

In this light, the only pureplay Italy ETF iShares MSCI Italy Capped EWI will be in the spotlight. The fund tracks the MSCI Italy 25-50 Index and is home to a small basket of 23 companies. The fund trades in average daily volumes of around 1.1 million shares. It is heavily concentrated in the top two firms holding more than one fourth of the total assets.

Financials takes the top spot in terms of sector holdings with 31.3% weight, followed by energy, utilities and industrials. The product has AUM of $555.9 million and charges 49 bps in fees per year from investors. It has a Zacks ETF Rank #5 or ‘Strong Sell’ with a Medium risk outlook (read: Prepare for Uncertainty with These "Quality" ETFs).

Another ETF that can come under the spotlight is iShares MSCI Europe Financials ETF EUFN. The fund provides exposure to financial companies in Europe by tracking MSCI Europe Financials Index. The fund trades in an average daily volume of around 800,000 shares and has AUM of $537.5 million. Italy has 5.2% exposure in the fund.

EUFN charges 48 bps in fees per year from investors. It has a Zacks ETF Rank #3 or ‘Hold’ with a Medium risk outlook (see: all the European Equity ETFs here).

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ISHARS-MS EU FN (EUFN): ETF Research Reports
 
ISHARS-ITALY (EWI): ETF Research Reports
 
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