Warning: Five Country ETFs Heavily Focused On Financials

by on May 25, 2010 | ETFs Mentioned:

As sovereign debt issues drag down the once mighty euro, markets around the world have slumped as speculation continues to swirl over which countries are likely headed towards default. Decades of wild spending have compounded with a shaky economy and costly bailouts to put many countries on the brink of fiscal catastrophe. While the $1 trillion European bailout has highlighted the seriousness of the problem, it has done little to solve it; eventually, countries will have to default or quickly scale down their levels of debt (see Why The European Bailout Is Just Postponing The Inevitable).

This focus on debt markets has once again put a strain on the financial sector; banks arguably have the most to lose from a sovereign default or a sharp recession caused by government belt tightening. When some investors seek international equity exposure through ETFs, they assume that such an investment gives them well diversified exposure to the local economy. But that isn’t always the case. While the S&P 500 SPDR (SPY) allocates about 16% of its assets to financials, some ETFs focusing on a single country can have more than 40% of holdings in the often-volatile sector. Below we profile five ETFs that focus on specific countries and have a disproportionate amount of assets in financial firms.

iShares MSCI Australia Index Fund (EWA)

Despite a well-developed and diversified economy, EWA allocates almost 45% of its assets to financial firms, with the next closest allocation coming in at 25% for industrial materials. Although the fund’s top holding is in mining giant BHP Billiton, the rest of the top five consists of banking firms. Due in part to this heavy concentration in banking firms, as well as recently proposed taxes on the mining sector, EWA has performed poorly in recent sessions, losing about 20% over the last month (also read Australia ETF: A Developed Market Play On China).

iShares MSCI Turkey Investable Market Index Fund (TUR)

One of the ETFs with the biggest bank concentration is TUR; it has more than 50% of its assets in financials (see TUR holdings). The next two largest sectors are no where close to this massive allocation; industrial materials make up about 14% while telecommunications makes up 10% or so. While the fund has performed well over the past 52 weeks (up about 50%) it has faltered as of late, posting a loss of about 15% over the past four weeks. This suggests that the heavy concentration in banking firms as well as the country’s proximity to Greece, has severely impacted the returns of TUR (also see Seven Surprising ETF Leaders Of 2010).

iShares MSCI Spain Index Fund (EWP)

Spain is often cited as one of the weaker economies in Europe and is widely seen as the next domino to fall in the sovereign debt crisis. This is due in part to the country’s high unemployment rate, which is currently over 20%, suggesting that any budget cuts will be met with stiff opposition from the general populace who will be furious to see additional workers unemployed. EWP currently allocates about 43% to financials; its second largest sector is telecommunications, which makes up 18% of the fund. In addition to being one of the more concentrated funds sector-wise, the fund is very top heavy for its individual holdings as well; Banco Santander makes up nearly 23% of the fund’s total assets (also see Ten Biggest Losers From Recent Selloff).

iShares MSCI Italy Index Fund (EWI)

Italy has had a history of unstable governments and high budget deficits, and its large banking sector has been severely impacted by speculation over debt defaults across the continent. Three of the top five holdings in this ETF are financial firms, and in total financials comprise about 40% of the fund’s total assets (the next heaviest sector is energy, coming in at 21%). The fund, which tracks the MSCI Italy Index, is among the worst performers among equity ETFs this year; it has posted a loss this year of almost 30%, much of which has come over the past four weeks (see Europe ETFs Plunge On Debt Downgrades).

Market Vectors Poland ETF (PLND)

Lastly, Poland is heavily concentrated in financial firms as well; it allocates nearly 39% of its assets to the sector. Both of the top two holdings of the fund are Polish banks, together they comprise just under 16% of the fund’s total assets (see more information on PLND’s fundamentals).

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Eric is long EWA.