3 ETF Trades For The Next Euro Zone Debt Crisis

by on March 6, 2012 | ETFs Mentioned:

The Euro zone debt crisis has been at the forefront since late 2009 when it became apparent that Greece was struggling to curb its towering deficit. Greece unsuccessfully implemented several austerity meassures aimed at restoring financial stability, ultimately succumbing to a bailout package in early May of 2010. History has repeated itself since then seeing as how Greek debt woes remain a burden despite a second bailout package. Investors have seemingly brushed aside lingering debt drama for the past few weeks as encouraging economic data on the home front has bolstered equities higher [see ETF Insider: Did Wall Street Forget About Greece?]. The bulls need to be aware that the overseas debt drama is far from resolved, and could spark more worries in months to come.

Although lawmakers have taken measures to ensure the longevity of the currency bloc, debt drama is infamous for resurfacing at the most inconvenient of times. It’s hard to ignore the fact that the most recent $170 billion Greek bailout package was passed in the face of violent protests in the debt stricken nation. Civil unrest has translated into political tension as several Greek policymakers have voiced their opposition to the proposed austerity measures, further adding to the cloud of uncertainty which is plaguing investors’ confidence. Investors who are trying to decipher all of the intricacies surrounding the bailout negotiations are likely overwhelmed; a recent article on ZeroHedge.com does an excellent job of outlining the various factors and terms associated with the Greek debt crisis.

The next bump in Europe’s (long) road to recovery could rattle the markets as early as April of this year. Parliamentary elections in Greece were slated for February, however, ongoing negotiations between European lawmakers have sparked concerns. Fearful that discord among legislators could cripple progress, the nation has pushed back elections until April. Kicking the can down the road has a proven track record of failure, which is why many are fearful that it’s only a matter of time until Greece is in the limelight once again.

Below we highlight three long/short ETF trading ideas which could appeal to investors who are worried that another bump in the road will inevitably rattle confidence in the markets:

Long FTSE Nordic 30 ETF (GXF) / Short MSCI EMU Index Fund (EZU)

The inspiration behind this trade is quite simple; if debt woes intensify once again, the most financially stable nations in the region, as represented by GXF, will likely outperform the debt burdened Euro zone as a whole, as represented by EZU. A long position in GXF allows investors to gain tangential exposure to the currency bloc by accessing equities from the historically stable nations of Sweden, Denmark, Norway, and Finland [see ETFs To Play AAA Europe]. Taking a short position in EZU is appropriate since it tracks all European Union members who have adopted the euro as their currency. This trade effectively allows investors to profit from the relative outperformance of the Nordic nations, which maintain currency independence, versus the European nation tied to the euro.

Long Dividend Ex-Financials Fund (DTN) / Short MSCI Europe Financials Sector Index Fund (EUFN)

Financial stocks from around the globe have taken a beating from all of the uncertainties spilling over from Europe. This pair trade is well positioned to benefit if investors take measures to scale back risk exposure. DTN bears safe haven appeal given its focus on dividend-paying securities and outright exclusion of the financials sector. If debt drama steals the headlines once again, Europe’s financial sector, as represented by EUFN, will likely fall victim to volatile profit-taking. This trade will appeal to investors looking to bet on the relative outperformance of “safer”, domestic, ex-financial dividend equities versus the European financials sector which remains riddled with uncertainties [see Financials Free ETFdb Portfolio].

Long Canada Bond Index Fund (CAD) / Short Euro Debt Fund (EU)

This pair trade will appeal to investors who wish to approach the debt crisis from a fixed income perspective. Canada’s bond market stands on stable fiscal footing relative to the debt burdened Euro zone, while still offering a meaningful yield in this historically low-rate environment [see Bond ETFs For Every Objective]. Signs of resurfacing European debt issues could spark a nasty sell-off across fixed income and equity markets alike; Canadian bonds are well equipped in such a scenario given their safe haven reputation relative to riskier European debt notes. This trade can generate a profit as long as investors opt for “safer” fixed income exposure in the face of potential risks arising from Europe.

[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]

Disclosure: No positions at time of writing.