What Does Italy Referendum Mean For These ETFs?

Includes: EUFN, EZU, FXE
by: Zacks Funds

After Brexit, it was the result of Italy's referendum which did not show friendly terms with the European Union. Having lost the Italian constitutional referendum by a wide margin, the Italian prime minister Matteo Renzi resigned. As much as 60% voters went against "streamlining the 68-year-old parliamentary system," intended at boosting Italy's ailing economy.

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. And if Grillo wins in an early election, he might dump euro, reintroduce the Italian lira and call for a situation like Brexit.

In this light, while the only pure play Italy ETF iShares MSCI Italy Capped (NYSEARCA:EWI) will be in the spotlight, we highlight a few ETFs that should be in focus in the near term or long term.

ETFs in Focus

CurrencyShares Euro Trust ETF (NYSEARCA:FXE)

Responding to the result of the referendum, the common currency euro plummeted to a 20-month low. Since exit polls had warned about 'no' votes, some analysts do not expect a steep crash in the common currency.

But in the long run, the impact might be appalling. This is especially true given the greenback's surge in anticipation of faster Fed rate hikes and the ECB's ultra-easy monetary policy along with a QE. So investors should keep a tab on the fund.

iShares MSCI Europe Financials (NASDAQ:EUFN)

Investors should note that Italy is eurozone's third-largest economy and is heavily in debt. There are investors who find the country's third-largest bank, Banca Monte Dei Paschi di Siena SpA (OTCPK:BMDPY), at risk as it is asking for 5 billion euros ($5.3 billion) in capital from investors.

Italy's banks have been under pressure due to "high costs and low returns for years". Analysts believe that "if Monte Dei Paschi or another struggling bank runs out of options", it could be an imitation of the situation caused by Lehman Brothers. In any case, European banks have been fragile lately given the woes in Deutsche Bank (NYSE:DB). iShares MSCI Europe Financials, thus, may come under pressure.

iShares MSCI Eurozone (BATS:EZU)

Italy government's referendum defeat may call for an upheaval in the near term as long as nothing more constructive comes up to outweigh the negative sentiment. This might put the Eurozone ETF in trouble.

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