While reports of jobless rates in the U.S. or the pace of inflation in China occasionally pop to the top of the headlines, the last several months have seen the spotlight focused on European markets as the continent continues to battle a debt crisis that has threatened to derail a fragile economic recovery. While the fiscal woes have been felt throughout Europe, the impact has not been felt evenly. Some of the more financially stable markets, such as Germany, have held up quite well; the euro’s weakness has actually given a boost to export-driven markets whose goods have become more attractively priced to foreign buyers.
At the opposite end of the risk spectrum from the relatively stable Germany, is the PIIGS group of economies that has emerged as a threat to bring down the entire euro zone. This group, which includes Portugal, Italy, Ireland, Greece, and Spain, are all facing growing debt burdens, widening budget deficits, and a host of other hurdles to sustainable economic growth.
Most investors probably view the PIIGS economies as opportunities to profit from short selling; the weak fundamentals and potential for further declines if austerity measures aren’t fully effective has created significant downside risk. Contrarians, on the other hand, may view the surplus of negative sentiment as an opportunity to establish a position at an attractive price point. The flexibility of ETFs allows investors to use these products to establish both long and short positions, increasing the number of potential applications regardless of the outlook for a specific market or asset class.
Some of the PIIGS are accessible through pure play country-specific ETFs, while other members of this bloc are without a dedicated ETF [also check out the ETF Country Exposure Tool]:
There’s no dedicated Portugal ETF, but a handful of funds that include minor allocations to this country. The Guggenheim Timber ETF (CUT) leads the way; this ETF has about 4% of its assets in Portuguese stocks.
Investors looking for exposure to Italy have the iShares MSCI Italy Index Fund (EWI), which is linked to an index consisting of about 30 Italian equities. Like many international equity ETFs, EWI has a heavy tilt towards the financial and energy sectors, and most of the components are large cap stocks. Italy also makes up a big chunk of funds offering exposure to the international utilities sector; both DBU and IPU have allocations of at least 10% towards this PIIGS member [see all ETFs with Italy exposure].
A couple of relatively recent additions to the ETP lineup give investors a way to establish exposure to Italian Treasury bonds; the PowerShares DB Italian Treasury Bond Futures ETN (ITLY) is linked to an index offering exposure to Italian government debt with a maturity of between eight and 16 years. The 3x monthly leveraged version (ITLT) offers a way to dial up the exposure to battered Italian debt.
The once booming economy of the Emerald Isle is accessible through the iShares MSCI Ireland Capped Investable Market Index Fund (EIRL), which includes about 25 stocks and has heavy tilts towards the consumer staples and basic materials sectors (building materials group CRH accounts for nearly a quarter of the portfolio).
Irish stocks account for minor portions of dozens of other equity ETFs, including the Dow Jones U.S. Medical Devices Index Fund (IHI, 8%), Nanotech Portfolio (PXN, 6%), and Direxion Airline Shares (FLYX, 5%).
Pure play Greece exposure isn’t accessible through an ETF, as there is no country-specific ETF dedicated to the economy that has been the most visible example of the Euro zone’s fiscal woes. The Guggenheim Shipping ETF (SEA) is the closest product out there, as Greek shipping stocks make up a little more than 10% of that fund. Beyond the shipping ETF, the Global X Aluminum ETF (ALUM) and Gold Explorers ETF (GLDX) also have much smaller allocations to Greek stocks.
Spain generally leads off any discussion of the most vulnerable economies, as the country is home to a staggering unemployment rate and surging debt burden. The iShares MSCI Spain Index Fund (EWP) offers exposure to Spanish stocks, with financial giant Banco Santander and telecom behemoth Telefonica combining to account for about 40% of assets. It’s worth noting that those two companies are both based in Spain but generate big portions of total revenues overseas (including significant Brazilian operations).
Beyond EWP, both wind energy ETFs maintain big Spanish exposure, as the country has become a leader in this corner of the alternative energy market. Spanish stocks account for about 29% of FAN and 18% of PWND [see Head To Head ETF Comparison Tool].
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Disclosure: No positions at time of writing.