For a nation that is home to just over 11 million people and the world’s 33rd largest economy, Greece sure has had a significant impact on global equity markets over the last year. Mounting government debt and declining tax revenues have forced Greek officials to take drastic measures to avoid defaulting on obligations, and sparked concerns of a widespread crisis. With neighboring countries and the International Monetary Fund (IMF) coming to Greece’s aid, many investors thought the situation had been sufficiently resolved. But several rounds of austerity packages and bailout proposals later, Greece’s future remains far from certain. While the current proposal supplies funds required to pay back bonds coming due this month, it is based on assumptions that Greece will be able to borrow again from capital markets in late 2011. Some think that timeline is overly aggressive, setting Greece’s neighbors up for more challenging decisions next year [Download 101 ETF Lessons Every Financial Advisor Should Learn]
Although the most immediate holes may have been plugged, the short-term focus of the Greek rescue plan suggests that the Mediterranean nation will continue to command an oversized spotlight on the global stage. While Greek equities make up a minor part of most ETFs in the European Equities ETFdb Category, there is no ETF focusing specifically on Greece; the Claymore Shipping ETF (SEA), which shut down last week following a bizarre administrative holdup, had maintained about 20% of its assets in Greek stocks. As the drama in Greece plays out, equity markets around the globe will reflect each significant development. But some ETFs may feel the effects of the Greek drama more acutely than others. Below, we profile six funds that could be impacted by the situation in Greece in coming weeks (for more actionable ETF ideas, sign up for our free ETF newsletter):
1. SPDR Gold Trust (GLD)
Safe haven investments have received a boost from turmoil in the euro zone, as GLD has gained almost 5% over the last month. If Greece remains a problem area–or if the debt crisis spreads to larger economies in the world–expect the flight to safety to continue, and the appeal of gold bullion to intensify (see GLD’s recent returns).
2. SPDR Barclays Capital International Treasury ETF (BWX)
While most fixed income ETFs focus primarily on debt issued by U.S. agencies and corporations, a handful maintain exposure to global debt markets. BWX is one of these ETFs, investing in bonds from about a dozen developed countries. According to the official fact sheet, Greek debt makes up about 4% of BWX’s assets, with several other European nations accounting for significant slugs as well (see all of BWX’s holdings). If yields on European Treasuries continue to rise, BWX could slide. If fears turn out to be overblown, however, this ETF could rally.
These currency products from PowerShares are designed to offer exposure to the performance of the U.S. dollar relative to a basked of developed market currencies; UUP replicated the performance of being long the dollar while UDN is a way to short the greenback. These ETFs offer exposure to six different currencies, but the euro accounts for by far the biggest portion, representing more than half of the related index. The euro has slid against the dollar recently–UUP is up about 1.2% over the last two weeks–and that trend could continue if the most recent plan bailout plan doesn’t calm investors (see a complete list of ETFs offering exposure to the USD/EUR exchange rate here).
4. MSCI Europe Financials Sector Index Fund (EUFN)
This ETF tracks the performance of the MSCI Europe Financials Index, a benchmark that consists of banks and other financial institutions listed in European markets. Greece doesn’t make up a material portion of EUFN–the UK, France, and Spain account for the largest weightings–but the continued weakness there could weigh on the financial sector in Europe. Several German, Swiss, and French banks are among large holders of Greek debt, meaning that they could feel the pinch if Greece defaults on its obligations [see Financials Free ETFdb Portfolio].
5. MSCI Germany Index Fund (EWG)
As one of Europe’s largest (and relatively stable) economies, Germany finds itself in the undesirable position of leading a bailout of cash-strapped neighbors. Germany’s commitment to stabilizing the euro zone hasn’t gone over very well with at home, with chancellor Angela Merkel feeling the pressure from her constituents after approving a nearly $30 billion outlay. If capital markets don’t open up as the current plan anticipates, Germany could be called upon to step in once again (see chart’s of EWG’s recent performance).
6. iPath S&P 500 VIX Short-Term Futures ETN (VXX)
One of the biggest beneficiaries of the turmoil in Greece has been the “fear index,” which tends to rise when uncertainty over future equity market performance creeps into the market. VXX shot up last week when issues in Greece popped up, and could be on the rise again if problems persist. One word of warning about investing in this ETN: the contango in VIX futures markets presents some strong headwinds to overcome (see Three ETFs That Could Be Crippled By Contango)
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Disclosure: No positions at time of writing.