Volcanic Ash Clouds Outlook For Europe ETFs

by on April 19, 2010

For the past several months Europe’s largest markets have taken their cues from one of their smallest neighbors, as financial turmoil in Greece regularly made headlines throughout the continent. The potential for a fiscal crisis in one of the bloc’s smallest economies highlighted the risks of the common currency system, and set off rounds of fierce debate over the obligations of richer European countries to intervene. Now, it is a completely different disaster from another of Europe’s relative unknowns that threatens to undermine a still fragile economic recovery.

Last week, an eruption beneath Iceland’s Eyjafjallajokull volcano began spewing ash and dust into the atmosphere, creating a potentially dangerous situation for aircraft flying through the region. The eruption has shot glass shards into the air that could cause major mechanical failures if they were to come in contact with an airplane engine. Taking a cautious approach, regulators ground flights to and from Europe. What was initially expected to be only a temporary closure has now dragged into its fifth day, and airlines estimate that more than 60,000 flights have been canceled.

While the impact on the aviation industry is fairly straightforward–analysts estimate that daily losses are in the neighborhood of $250 million–the concern is now that the slowdown will reach into other areas of the European economy (see Volcano Grounds Airline ETF). “Economists said that if the closure ends in coming days, its financial impact will remain limited to industries such as aviation, tourism and manufacturers that rely on just-in-time delivery by air,” writes Daniel Michaels. “If the flight ban drags on, however, the pain will be far deeper.”

It is still unclear how long the airline blackout will last and how serious the economic ramifications will be, but the impact is already being felt throughout the world. Kenya’s Daily Nation newspaper estimates that the Kenyan economy is losing almost $4 million daily as a result of flight cancellations to Europe. Kenyan farmers are reportedly dumping stocks of food and other goods earmarked for Europe, a scenario that could play out across agriculture-intensive economies in Africa and South America. But the biggest impact will likely be felt in Europe, where tourism has already taken a major hit and other industries could be next to feel the pinch.

Europe ETFs In Focus

The fallout from the recent volcanic eruption adds yet another roadblock on a road to recovery already littered with a dire fiscal situation in Greece, record high unemployment in several major economies, and swelling government debt. Below, we profile three Europe ETFs that could be in focus as all of these situations play out (see all ETFs in the Europe Equities ETFdb Category):

  • Vanguard European ETF (VGK): This ETF is the most popular option for gaining broad-based European exposure, investing in nearly 500 stocks listed in more than a dozen countries. If the situation in Europe’s airspace isn’t quickly resolved, VGK could encounter some turbulence.

  • ProShares UltraShort Europe (EPV): For more active investors looking to capitalize on anticipated weakness in the European economy, EPV may be an interesting play. This ETF seeks daily returns equal to -200% of the daily return on the MSCI Europe Index.

  • iShares MSCI Spain Index Fund (EWP): This ETF tracks the MSCI Spain Index, a benchmark measuring the performance of one of Europe’s most troubled economies. The volcanic cloud could actually be a boon to Spain, as Infrastructure Minister Jose Blanco said yesterday that all Spain’s airports were now open. The country has offered to let other European nations use Spanish airports as stopovers, giving Spain a leg up on its neighbors (see What Every Investor Should Know About The Spain ETF).

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Disclosure: No positions at time of writing.