Five ETFs For A Tumbling Euro

by on February 25, 2010 | ETFs Mentioned:

With continued worries over budget crises in the “PIIGS” (Portugal, Italy, Ireland, Greece, and Spain) and their rapidly deteriorating fiscal conditions, the future of the euro zone’s common currency has been called into question. Most of attention has focused on Greece, where double digit budget deficits threaten to grind the government to a halt and spread throughout the region. While some are pushing for a Greek bailout, others worry about the signal this action might send to other troubled economies across the Mediterranean. Greece’s richer counterparts certainly aren’t happy about the idea of a bailout, especially in Germany where in a recent poll 53% demanded that Greece be thrown out of the euro zone if they can’t solve their problems without outside funding.

Will Greece Cause the Euro to Crumble?Some are even calling for the end of the euro or are pushing for stronger members, such as France and Germany, leave the common currency before it drags down their economies too. On the other end of the spectrum, some economists have proposed that weaker countries, such as Spain, could actually benefit from leaving the euro zone. Such a move would permit a devaluation that would instantly increase global competitiveness and spur the national economy.

All of these concerns have chipped away at the value of the euro since hiting a 52 week high of $1.51 in late November. In fact, the euro has lost more than 10% against the dollar since the first of the year. While there are some obvious beneficiaries to a weak euro, such as PowerShares DB USD Index Bullish Fund (UUP), weakness in the currency could potentially impact several other ETFs as well. Below, we highlight five ETFs that could be impacted by the euro’s future.

iShares MSCI Germany Index Fund (EWG)

As the second largest exporter in the world and by far the largest exporter in the EU, Germany stands to greatly benefit from a weaker euro. As the French Finance Minister recently pointed out, a weak euro is good for exporters, and Germany’s inclusion in the euro zone has likely prevented exports from becoming uncompetitive in the global markets. EWG contains 51 firms that are based in Germany and some of its largest holdings include industrial giants and exporters. Siemens (9.9%), pharmaceutical giant Bayer (7.4%), and BASF (6.9%) all have big allocations in the fund. For sectors, the largest is financials at 18.6% but industrials, materials, and consumer discretionary firms combine to make up nearly 40% of the fund.

Claymore/NYSE Arca Airline ETF (FAA)

Many destinations in Europe are among the most popular in the world for tourism, and a weak euro makes sightseeing in Paris or Rome much more attractive to American consumers. A stronger dollar could also slice into oil prices, which would boost profits for airlines. One option to play this trend is FAA, which focuses on passenger airlines around the world. Even though the fund has allocations to European and Asian airlines, the vast majority of its assets, 75%, are in American airlines that could benefit from a cheaper euro zone.

iShares Barclays 20 Year Treasury Bond Fund (TLT)

Recently, there has been talk of sharply downgrading Greek debt below its current rating of BBB+. This could push Greek debt below the investment grade threshold, which would have a devastating effect on interest rates in Greece. Furthermore if the trouble spreads to other, larger countries, such as Italy and Spain, it could further drag down the euro and make investors wary of investing in euro-denominated bonds. This could cause an exodus from EU bonds for the relative safety of U.S. Treasuries. TLT focuses on long-term treasury bonds, which in addition to benefiting from potential deflation (see Five ETFs To Own During The Great Deflation) stand to gain the from increased fears over the state of the euro zone. Of course, TLT and other long-term bond ETFs will also be impacted (perhaps more significantly) by the Federal Reserve’s actions.

Claymore/Robb Report Global Luxury Index ETF (ROB)

A falling euro makes goods from Europe less expensive in foreign currencies, which will make it easier for consumers, especially in North American and emerging Asian countries, to consume luxury goods. This could boost sales for the many luxury firms that are based in continental Europe, particularly those that generate a major portion of their revenue from overseas. ROB focuses on these luxury goods with a global scope, holding 32 different securities, the vast majority of which are in the consumer discretionary sector. As far as European holdings go, ROB has 27.9% in France, 12% in Germany and 7% in Italy. With emerging Asian consumers and a weaker euro making the products of nearly 45% of this fund’s holdings cheaper, the future could be bright for ROB and its European exporters.

IQ ARB Merger Arbitrage ETF (MNA)

When the euro was strong relative to the dollar, we saw a slew of hostile takeovers from European companies, such as the acquisition of Anheuser-Busch by Belgian beer giant InBev. A strong dollar may result in a reversal of this trend that will see a wave of U.S. buyouts of European companies (Kraft’s Cadbury plan indicates this may already be under way). If M&A activity does ramp up, MNA could become an interesting play. This ETF that seeks to achieve capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer. The fund does this by owning certain announced takeover targets, with the goal of generating returns that are representative of global merger arbitrage activity. In addition, the fund includes short exposure to global equities as a partial equity market hedge, currently in the form of the ProShares Ultrashort MSCI EAFE (EFU).

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Disclosure: No positions at time of writing