Hedging PIIGS Risk with ETFs

by: ETFdesk

Acronyms for blocs of countries are all the rage these days: BRIC, MAVENS, now PIIGS (Portugal, Italy, Ireland, Greece, and Spain). As the BRICs and MAVENS were created to group strong growth countries into an investable group, the PIIGS are the polar opposite: countries on the brink of disaster. We didn't coin the acronym "PIIGS", but we are the first out with a comprehensive way to "play" it.

Europe's woes, particularly those in Greece have been well documented, as debt ratios and budget deficits are climbing. Sovereign risk is rising. Portugal just yesterday announced a budget deficit that was 9.3% of GDP vs. previous estimates of 8%. S&P and Moody's have downgraded or slapped negative watches on Spain, Greece, Portugal debt in recent weeks with Moody's going so far as to warn that Greece and Portugal's economies may suffer a "slow death." The IMF is estimating that Italian public debt will reach 120% of GDP next year. Ireland was forced to raise taxes and slash $3.6 billion government spending to help contain their annual budget deficit. In addition to a large budget deficit, Spain is battling the highest unemployment rate in Developed Europe and a Real Estate implosion worse than that of the United States.

The question now remains, how can investors hedge or speculate on PIIGS risk? For those of you with contacts at Sovereign Debt CDS trading desks you can easily buy protection on any of the PIIGS debt. As the charts below show, this has been a profitable trade of late. Simply amazing to us that PIIGS trade at wider spreads than BRICS. Great charts from Credit Derivative Research:

source: Economist
source: Credit Derivatives Research, Y-axis in basis points

The next best way to hedge/speculate on PIIGS risk other than the actual sovereign debt it probably the Euro. Of course you can invest directly in the currency of use exchange traded products such as FXE - Rydex Euro Currency Trust or its two times leveraged sibling EUO ProShares UltraShort Euro. While a weak Euro should follow the fiscal troubles of its member countries, its likely not the most precise vehicle. There are two broad based funds, IGOV iShares S&P/Citigroup International Treasury Fund and the iShares MSCI-EMU index, EZU. However, IGOV contains only moderate exposure to PIIGS (23% of PIIGS Sovereign Debt).

However, this fund is invested in about 25% of Japanese Gov. bonds as well as over 15% in France and Germany. If you are a worried about Sovereign Debt risk, in general, this might be a good short vehicle if you can borrow the shares. EZU might be another broad-based PIIGS proxy, but companies based in France, Germany, and the Netherlands make up ~60% of the fund, with only about 25% in Spain and Italy and fractional amounts in Greece, Portugal and Ireland. While Europe, in general, looks to be in trouble, recovery in the Eurozone seems to exhibiting two tracks. As France and Germany, in particular, seem to be staging a moderate recovery, this may not be the best vehicle.

There are country specific PIIGS ETFs, but shorting maybe prive difficult as shares are difficult to borrow. If you can find the shares these might be good opportunities to hedge or speculate on PIIGS risk:


EWI iShares MSCI-Italy


IRL The New Ireland Fund


There is currently no US ETF for Greece, however, there is an MSCI Greece index ETF: LYX0BF that trades on the Xetra exchange that many with online brokers can access. Keep in mind this fund trades in Euros.


SNF Spain Fund

EWP iShares MSCI-Spain

At ETFDESK, we endeavor to create an open forum for ETF investing, so other ideas are certainly welcomed.

Disclosure: No Positions