The hot and soaring corner of the world equity market seems to be losing momentum this week as European stocks declined for the fourth consecutive day, with the STOXX Europe 600 index dropping 0.7% over the past one week.
This is especially true as political pressure has started rebuilding in the space with uncertainty in the Greece bailout deal and fears of early elections in Italy. Additionally, dashing hopes of the unwinding of ECB's stimulus program and the slide in banking stocks have added to the woes.
The Greece debt drama flared up when the German newspaper, the Bild, revealed that Greece might simply decline its next bailout payment of €7 billion due in July if creditors cannot strike a debt relief deal. This would likely result in new wave of default and renewed Grexit talks. However, Athens denied the German newspaper report and stated that it is hoping for a debt relief in the June 15 meeting of eurozone finance ministers.
As talks over a new electoral law by the four major political parties are rife, the country could be headed for a general election as soon as September compared with its scheduled May 2018 vote. Former prime minister Matteo Renzi favors an early election, citing that holding Italy's vote simultaneously with Germany in the fall "makes sense for Europe". Talks of a snap election could again lead a rise in the populist movement in Europe.
European Central Bank President Mario Draghi hinted at the continuation of a large stimulus in its June 8 meeting given the subdued inflation, although the eurozone has seen the best growth in a decade. The news has dampened investors' mood, somewhat pushing the European stocks down.
Equity strategists at Deutsche Bank downgraded the European banking sector to underweight, citing waning momentum in eurozone growth that would weigh on the sector in the coming months. "Banks are among the sectors most sensitive to swings in euro area PMI momentum and tend to underperform when it turns negative," as per the strategists.
ETFs in Focus
All these factors have dulled the appeal for European equities and related ETFs at least for the coming weeks. While several ETFs have seen rough trading, we have presented the ones that are likely to be impacted the most by the recent events.
iShares MSCI Italy Capped ETF (NYSEARCA:EWI)
With AUM of $599 million, the fund offers exposure to a broad range of companies in Italy by tracking the MSCI Italy 25-50 index and holding 23 stocks in its basket. It is heavily concentrated on the top four firms with a combined 45.4% share while other securities hold less than 4.5% of total assets. Further, about 34.1% of the fund's portfolio is allotted to financials while energy, utilities, industrials and consumer discretionary round off the top five with a double-digit exposure each. The fund trades in heavy volume of more than 1.3 million shares a day on average and charges 49 bps in annual fees. It has shed about 3% over the past five days and has a Zacks ETF Rank of 3 or "Hold" rating with a Medium risk outlook.
Global X MSCI Greece ETF (NYSEARCA:GREK)
The fund offers exposure to the 33 largest and most liquid companies in Greece. It follows the MSCI All Greece Select 25/50 Index, charging investors 62 bps in annual fees. It is heavily concentrated on the top two firms that collectively make up for 23.8% while other firms account for no more than 7.4% share. Financials takes the top spot at 33% in terms of sector holdings, followed by consumer discretionary (20%), energy (18%) and telecom (11%). The product has accumulated $376.1 million in its asset base and trades in a solid average daily volume of around 447,000 shares. It has lost 2.9% in the same time frame and has a Zacks ETF Rank of 2 or "Buy" rating with a High risk outlook.
iShares MSCI Europe Financials ETF (NASDAQ:EUFN)
This fund provides exposure to the financial segment of the developed European market by tracking the MSCI Europe Financials Index. It holds 86 securities in its basket with banking firms accounting for a major 55.6% of the portfolio. Insurance and diversified financials round off the next two spots. In terms of country exposure, United Kingdom takes the top spot at 28.6% while France, Switzerland, Spain and Germany make up for at least 11% share each. EUFN has amassed $1.2 billion in its asset base and charges 48 bps in fees a year. Volume is heavy, exchanging nearly 1.3 million shares in hand per day on average. EUFN has lost 1.2% over the last five days and has a Zacks ETF Rank of 2 with a Medium risk outlook.
SPDR EURO STOXX 50 ETF (NYSEARCA:FEZ)
This fund follows the EURO STOXX 50 Index, which measures the performance of some of the largest companies across the components of the 19 EURO STOXX Supersector Indices. The fund is rich with AUM of $3.7 billion and charges 0.29% in expense ratio. Holding 54 securities in its basket, the product is tilted toward the financial sector at 22% while industrials, consumer discretionary, consumer staples and healthcare round off the top five. In terms of country allocation, France and Germany are leading with 36.1% and 32.9% share, respectively, followed by Spain (10.7%), the Netherlands (9.8%), and Italy (4.56%). The fund is down 0.8% in the same time frame and trades in average daily volume of nearly 3.1 million shares. It has a Zacks ETF Rank of 1 or "Strong Buy" with a Medium risk outlook.