By Matthew McCall
Investor confidence increased in Germany and the country's stock market rallied to a new all-time high Monday night.
The German ZEW survey of investor confidence came in at 52.8 in October, well above the estimates and the reading from September. This number along with the possibility of a deal in D.C. was enough to send the DAX Index to the highest intraday level ever.
For the year the DAX, Germany's leading stock index, is lagging the U.S. markets with a gain of 15 percent. But the breakout Monday night was significant in that it shows the strong bull market remains intact. Investors in the U.S. can play the German market with a handful of individual stocks or turn to one of the ETFs that focus on the country.
iShares MSCI Germany Index ETF (EWG)
The ETF is a basket of 54 stocks focused mainly on the large-cap asset class within the country. The sector allocation is diverse with consumer discretionary, financials, materials, and industrials all making up at least 14 percent. The largest holdings are three German multinationals, Siemens AG (SI), Bayer AG (OTCPK:BAYRY), and BASF SE (OTCQX:BASFY).
While the DAX is hitting record highs, EWG remains below its 2011 high and would need to rally another 29 percent to regain the all-time high set in 2007. The underperformance of EWG versus the index is the composition of the ETF. While the DAX is more diverse, EWG is more reliant on a small number of stocks. This is often the case with country ETFs.
iShares MSCI Germany Small Cap ETF
This year it would have been a better investment to concentrate on the small cap stocks in Germany over the big names. In 2013, EWGS is up 23 percent versus a gain of 14 percent for EWG. The ETF is made up of 103 small cap stocks based in Germany with a heavy concentration on the industrials. The top holdings are companies that most U.S. investors would not recognize, and that is not always a bad thing. The ETF recently closed at its best level since it began trading in January 2012.
db X-trackers MSCI Germany Hedged Equity ETF (DBGR)
The ETF tracks the same index as EWG, except it is hedged for any fluctuations between the U.S. dollar and the Euro. Essentially the ETF is long German stocks and short the Euro versus the U.S. dollar. Recently the Euro has been moving higher in value versus the greenback due to the mess that is taking place in D.C. If the view is German stocks will continue their uptrend, but the Euro is due to fall then the best option would be DBGR.
There is always country-specific risk when buying a single-country ETF and the German ETF is no different. That being said, of all the European nations, Germany is one of less volatile and safer bets.
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