For much of 2010 the euro zone has taken center stage, giving directions to equity markets around the world as the debt-laden continent did its best to stave off a potentially devastating fiscal crisis. In recent weeks, a number of positive indications have emerged, giving investors hope of a rally not only in Europe but around the globe. Recent stress tests of 91 of the major European banks showed that only 7 would need additional capital in a “worst case” scenario; these figures helped to ease investors’ minds, flashing signs that Europe’s downtrodden financials may be on their way to a recovery. Following these positive stress tests, the euro-zone reported better-than-expected GDP growth of 1% for the second quarter today. The impressive showing was led by Germany, which posted gains of 2.2% on a quarter-over-quarter basis.
But amidst all of the seemingly positive indications, some troubling developments are brewing in one of the promising figures to come out of this 16 country union, problems are beginning to surface in Ireland [see also The Case For The Ireland ETF (EIRL)].
Though it seemed that the vast majority of banks were fine to stand on their own, Irish banks have come under renewed scrutiny. It was announced this week that the Anglo Irish Bank will be receiving an additional €10 billion, on top of the €14.3 billion already that the government has allocated to the struggling bank. This secondary bail-out paints the bank in a negative light, as it appears too weak to stay afloat without government intervention. But the problems do not stop there. “Bank of Ireland, 36%-owned by the government, reported a pretax first-half loss nearly twice as big as its loss a year earlier,” writes Sara Schafer Muñoz. The combination of these two events has contributed to a spike of 36% in credit-default insurance costs in just one month, hinting at low confidence and soaring chances of default. Below, we outline two ETFs that could be in trouble if these events are signs of trouble on the horizon.
MSCI Ireland Capped Investable Market Index Fund (EIRL)
iShares‘ EIRL tracks the MSCI Ireland Investable Market 25/50 Index, market capitalization weighted benchmark designed to measure the performance of equity securities in the top 99% by market capitalization of the equity securities listed on stock exchanges in Ireland. This relatively new ETF holds just 23 securities, with the Bank of Ireland (7.11%) making its mark as one of the largest components. Though financials represent only about 13% of this fund, weakness in Irish banks would likely spread to the rest of the economy [see all of EIRL's fundamentals here].
MSCI Europe Financials Sector Index Fund (EUFN)
EUFN measures the MSCI Europe Financials Index, a free float-adjusted, market capitalization-weighted index designed to measure the combined equity market performance of the financials sector of developed and market countries in Europe. This fund features 115 holdings that are entirely based in the financials sector of Europe. From a country perspective, this ETF focuses on the United Kingdom (31.5%), Switzerland (12.1%), France (11.7%), and Spain (11.4%). EUFN maintains minimal allocations to Ireland, but that does not mean that the fund is safe [see all of EUFN's holdings here]. Although Ireland seems to be the biggest problem area at present, it wouldn’t be surprising to learn that other European financial institutions are in the same boat [see also Three ETF Ideas For The Third Quarter].
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Disclosure: Photo courtesy of Andrew Parnell. No positions at time of writing.