Just when many investors thought that the world economy was finally back on track, European debt markets were rocked by a crisis of confidence that sparked fresh concerns of a double dip recession and prolonged period of economic contraction. The sovereign debt crisis began earlier this year in Greece, but in recent months has been threatening to spread to much larger economies across Europe, including Italy and Spain. These countries, along with Portugal and Ireland, have seen sharp increases in unemployment and a push towards austerity as a way to combat rising concerns over high budget deficits. While it appears that most economies will scrape through this crisis without resorting to default, the increase in anxiety has sent markets tumbling nonetheless. The worst damage has been done closest to the eye of the storm; almost all of the ETFs in the Europe Equities ETFdb Category are down on the year, with many of them sharply lower [for ways to avoid Europe with a global portfolio make sure to read ETF Ideas For An Ex-Europe Portfolio].
While this entire category has been battered so far in 2010, not all have felt equivalent pinch equally; the iShares MSCI Sweden Index Fund (EWD) is actually up slightly on the year. On the other end of the spectrum, the three ETFs profiled below represent the worst hit European funds so far in 2010; all have posted losses of more than 20% in the past six months and look to (hopefully) rebound going into the second half of the year [see this report for ways to access Europe without the euro exposure].
SPDR DJ Euro STOXX 50 ETF (FEZ)
The third worst hit European equity ETF is the broad-based large cap FEZ, which is down 22% so far in 2010. The fund focuses on giant cap firms, which make up nearly three quarters of assets, and is heavily weighted in the two largest economies in Europe; Germany (27%), and France (35%). Unfortunately for FEZ shareholders, the fund holds close to 25% of its assets in Italian and Spanish firms and allocates almost 30% to the financials sector, three of the hardest hit areas of the European markets. Spanish financial behemoth Banco Santander is the second largest holding of the fund, making up 5% of FEZ’s total assets [also read Five ETF Ideas For Contrarian Investors].
iShares MSCI Italy Index Fund (EWI)
Despite staying out of the headlines for much of the first half of the year as its counterparts in Greece and on the Iberian peninsula were pummeled, Italy’s stock market has sunk the second most in the European Equity ETFdb Category so far in 2010. This is likely due to the fact that if Italy were to fall then nothing could bail them out; the country is the seventh largest economy in the world, equal in size to India and Mexico combined. The Italian fund is also heavy on financials (40.1%) and energy (20.9%) companies, which have been among the worst performers this year due to rising credit concerns for financials and a slumping oil price for the energy industry. Despite a 6.3% run-up over the past four weeks and a robust dividend yield of 3%, EWI is still down 25% so far in 2010 [also see Warning: Five Country ETFs Heavily Focused On Financials].
iShares MSCI Spain Index Fund (EWP)
The worst performing ETF in the category so far in 2010 is EWP a fund that tracks the hard hit Spanish market. This is likely not much of a surprise to many investors considering the country’s massive current account and budget deficits as well as unemployment reaching 20%. These problems have helped to push down EWP close to 26% thus far in 2010. Much like its Italian counterpart, EWP has a heavy focus on financials, which make up almost 45% of the fund’s total assets (including a 23% allocation to Banco Santander). In addition, the fund also has a heavy focus on telecommunication firms (18%) as well as industrial materials companies (13%) [also read Is The Spain ETF Doomed?].
Disclosure: No positions at time of writing.