Tough Road Ahead for the Germany ETF?

Germans celebrated this week the 20th anniversary of the of the fall of the Berlin Wall and the end of the division of Europe. For many, the occasion was no doubt a welcome departure, however briefly, from the economic troubles currently facing a united Germany. Europe’s largest economy will continue to feel the effects of the economic crisis well into next year warned Chancellor Angela Merkel, with unemployment expected to surge and corporate profits expected to plunge.

The German government has a policy of subsidizing short-hours shifts at German companies, a measure that has kept unemployment artificially low as the number of “underemployed” Germans has increased. Now Merkel, in her first major policy speech since her new center-right government took office, told Germans that the challenges facing their economy will continue to mount. “The problems will become bigger before things get better,” Merkel said.

Merkel, who leads a new pro-business coalition, has pledged to cut taxes by about €24 billion beginning in 2011, a move that has been criticized by economists and opposition politicians alike pointing to the massive projected budget deficit facing the government.

Calling Germany’s current situation “a challenge the likes of which it has not seen since reunification,” Merkel outlined five key goals for her administration, including growth in exports, improving relations between citizens and the state, overhauling the pension system, developing a sustainable plan for natural resources, and promoting freedom and security.

ETF Plays On Germany

The iShares MSCI Germany Index Fund (EWG) is the best pure play option for U.S. investors looking to gain exposure to the German stock market. EWG has gained more than 15% so far in 2009, but ranks last in year-to-date performance in our Europe Equities ETFdb Category.

EWG offers diversified exposure to the German economy, with allocations of at least 10% to each of the health care, materials, consumer discretionary, utilities, industrials, and financials sectors. The largest holdings in EWG as of October 30 included Siemens AG (SI) (9.6%), E.ON (9.6%), and Bayer (6.9%).

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Disclosure: No positions at time of writing.