Europe ETFs Plunge On Debt Downgrades

by on April 27, 2010 | ETFs Mentioned:

The tiny European nation of Greece has had a huge impact on the global economy in 2010, as its budget deficit spiraled out of control until ultimately reaching unmanageable levels earlier this year. After last week’s announcement that Greece was going to tap an aid package from other euro zone members (as well as the IMF), many believed that the worst of the European sovereign debt crisis was nearing an end. However, fresh concerns earlier today in Europe rocked markets and sent shares plunging more than 4% across virtually all of Europe.

Standard & Poor’s cut Greece’s rating to junk status (BB+) and slashed Portugal’s debt rating from A+ to A-, sending markets into a severe slump. This came after S&P said that it estimates Greece’s debt/GDP ratio will hit 124% in 2010 and 131% in 2011, while Portugal’s debt-to-GDP ratio will soar from 66% in 2008 to 95% in 2013.

Evidence that the crisis is spreading beyond Greece sparked a big sell-off, and investors turned their focus to Spain and Italy, two markets also suffering from high levels of debt. Trouble in these debt-laden economies could pose a much more significant threat to the stability of the European economy (also read SEA: The Closest Thing We Have To A Greece ETF).

Spain and Italy, two of the ten largest economies in the world, are each accessible through U.S.-listed ETFs: the iShares MSCI Spain Index Fund (EWP) and the iShares MSCI Italy Index Fund (EWI). Both of these ETFs were among the biggest losers in mid-day trading after the S&P news broke; shares plunged by more than 5% at one point in the trading day. EWI has a heavy focus on financials (39.5%) and energy firms (24.5%) and only holds 36 companies in total. The Spain ETF also has a heavy focus on financial firms, which make up close to 43% of the fund’s total assets (see the complete holdings breakdown for EWP here). Some of its largest holdings include banking giant Banco Santander (23.1%) and Telefonicia (18.9%), which were both down sharply in Tuesday trading (also see What Every Investor Needs To Know About The Spain ETF).

Another big loser on the day was the European Financials Fund (EUFN), which saw its shares tumble by close to 5% due to its significant exposure to Italy and Spain. In fact, two of its top three holdings are the aforementioned Banco Santander and BNP Paribas, which has significant operations in Italy. These two financial juggernauts combine to make up 11.6% of the fund and were down 6.1% and 7.0% respectively in mid-Tuesday trading. Look for all three of these ETFs to be in focus if the sovereign debt crisis spreads throughout Europe and threatens to bring down some of the world’s largest economies with it.

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Disclosure: No positions at time of writing.