Market Overview

Four ETFs For Hungary's New Junk Status

Of the many presents investors would probably like to give back this Black Friday one came courtesy of Moody's Investors Service and that was a downgrade of Hungary's credit rating to junk status.

As Benzinga reported earlier, Hungary was downgraded by Moody's Investors Service from Baa3 to Ba1 with a negative outlook a week after it had to ask the International Monetary Fund for help.

Hungarian Prime Minister Viktor Orban is making the Moody's downgrade out to be an assault on Hungary itself and while that may good to drum up some national pride, it doesn't change the fact that an already financially imperiled nation now faces higher borrowing costs.

And don't think that just because Hungary isn't a member of the Euro Zone there aren't ways to play this news. There are and here are some ETFs you might want to short or avoid on news of Hungary's new found junk status.

SPDR S&P Emerging Europe ETF (NYSE: GUR): While Hungary accounts for just 3.7% of the SPDR S&P Emerging Europe ETF's weight, the country's problems are really the icing on the cake for an ETF that devotes 80% of its weight to Russia and Turkey. There isn't a Euro Zone member found in GUR, but Europe's sovereign debt crisis has and will continue to punish this ETF.

iShares MSCI Emerging Markets Eastern Europe Index Fund (NYSE: ESR): There isn't a huge amount of difference between GUR and the iShares MSCI Emerging Markets Eastern Europe Index Fund. Both are heavy on Russia. The sector breakdowns are comparable and the charts are interchangeable, which is to say both should be avoided. Hungary accounts for over 3.5% of ESR and in the absence of Hungary-specific ETF, GUR and ESR make for fine shorting opportunities.

EGShares Health Care GEMS ETF (NYSE: HGEM): You might be thinking health care stocks and ETFs might be a place to hide out in this wild market environment. They might be, but HGEM probably isn't the place to do the hiding-out. As if the 57% combined exposure to India and China isn't bad enough, Hungary accounts for 4.9% of this ETF.

SPDR S&P International Dividend ETF (NYSE: DWX): If one did no further due diligence beyond noting “dividend” in the name of this ETF and seeing that DWX has a yield of close to 7.6%, this ETF might look like a pretty good idea right now. Think again. The yield is inflated by a declining price, which could fall further courtesy of a terrible chart. Oh yes, three of the PIIGS are found in this ETF as well as Belgium. That makes the almost 1% weight to Hungary an added bonus for traders looking to short DWX.

Bull case: Are you crazy? Kidding aside, the bull case for GUR and ESR could take months to materialize and if it does, it will be because of Russia, not Hungary. On the basis of yield, DWX might be the only ETF here worth even a small position at the moment.

Bear case: Moody's lowers its ratings further on Hungarian debt, a legitimate possibility. Fitch Ratings and Standard & Poor's could get in on the fun as well. Hungary's debt as a percentage of GDP rises above the current level of 81%.

Posted-In: Analyst Color Long Ideas News Sector ETFs Bonds Short Ideas Dividends Specialty ETFs Best of Benzinga

 

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