Time for this Top-Ranked Italy ETF?

While Germany and France had a head start in the Eurozone recovery, Italy was not far behind. Though Italy is yet to come out of the recession, economists and the Italian Government are optimistic that the Eurozone’s third largest economy will revisit the growth path in the last quarter of the year ending a nine consecutive quarter long recessionary steak (read: Europe ETF investing 101).

Italy’s economic recession eased out in the third quarter when GDP contracted 0.1% on a quarter-over-quarter basis and 1.9% on a year-over-year basis. The rate of decline came in the low end of the forecast range of 0.1%–0.2% fall in GDP. Improvement in the industrial sector was more than offset by shrinkage in Italy's services and farming sectors.

Although improvement in exports this year was the most eye-catching part in the Italian story, Italy's trade balance returned to surplus since August this year. EU trading partners accounted for 54.3% of total Italian foreign trade in September, while trade with non-EU members make up the remaining 45.7%. Thus, with the majority of European countries on a rebound, an improved trading activity is expected for Italy ahead.

Considering the entire scenario, Italian recovery is way behind its pre-crisis level thanks to the extremely high debt to GDP ratio (more than 100%), unenthusiastic credit ratings and an elevated level of unemployment rate which infact treaded higher in September (12.5%) form August.

However, the country embarked on a recovery trail and the crisis seemed to have bottomed out. It is now just a matter of time for a full-fledged comeback (read: Why PIIGS ETFs Are Outperforming).

Given Italy’s ruffled but rebounding fundamentals, a look at the top ranked Italy ETF in the Europe ETFs space could be a good idea, especially when using our Zacks ETF Ranking system.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (Read: Zacks ETF Rank Guide). Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the European equities space, we have taken a closer look at the top ranked EWI. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ (see the full list of top ranked ETFs) and is detailed below:

EWI in Focus

Launched in March 1996, iShares MSCI Italy Capped ETF (EWI) is a passively managed exchange traded fund (ETF) looking to deliver the return of the MSCI Italy 25/50 Index.

The fund is one of the most popular in the Europe equities space with more than $842.0 million in assets. However, the choice is a bit concentrated both from an individual security and sector perspective.

With 24 stocks in its basket, this fund from iShares puts as much as 64.0% of its total assets in the top 10 holdings, suggesting high concentration risk. Top companies include ENI SPA – taking up 18.4% share of the basket, and Unicredit SPA and ENEL SPA accounting for a respective of 7.2% and 6.6% of the total (see 3 Top Ranked Mid Cap Value ETFs in Focus).

In terms of sector exposure, financials comprise roughly one-third of the total assets while energy companies make up around one-fifth of the fund. Beyond this, utilities, industrials and consumer discretionary round out the rest of the top five – all having double-digit exposure – making up a combined 40%. Telecommunication (5.64%) gets the least weight.

With a huge trading volume of around 1,300,000 shares a day, the fund provides investors ample liquidity. The choice is also a cheaper one as it charges 49 basis points in fees a year which is below the average expense ratio 54 basis points in the Europe equities space. In fact, higher trading volume led to relatively lower expenses.

Style-wise, growth funds account for only 28% of the portfolio while value share sit at the top with 64% exposure keeping the fund away from excessive volatility. As much as 79% focus on large caps also calls for lower volatility (see 3 Top Ranked Europe ETFs to Buy Now).

The fund has returned around 12.8% in the year-to-date frame ending November 15, 2013 which is not far behind the 18% return of the broader European fund Vanguard FTSE Europe ETF (VGK). EWI has returned a decent 19.6% in the last one-year period ended September 30, 2013. The fund is currently hovering near its 52-week high level. EWI pays out a yield of 2.03% per annum.

Bottom Line

EWI could be a winner as the underlying country is about to return to growth. So, for investors willing to be part of this uptrend. EWI may be an interesting choice.

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