In an attempt to stave off deflationary worries, the European Central Bank shocked the global market by establishing a negative interest rate last week. The central bank slashed its benchmark interest rate from 0.25% to 0.15% and lowered the deposit rate from zero percent to -0.1% (read: Negative Interest Rates Put These European ETFs in Focus).
The continuation of an easy money policy, in its truest sense, across the Euro zone spread cheer among investors who once again tilted toward risky bets across the region. While some developed European nations started to score better economically since late-last year, the ECB's recent round of easing benefitted several emerging European countries.
Investors should note that banks in Southern Europe are wrapping up bad loans and refraining from new lending to businesses which is slowing growth. The new step ensures that banks will have to pay to leave money with the ECB, a step toward bolstering lending to businesses.
Moreover, financial institutions can loan money from the ECB to an amount worth seven times their outstanding loans to non-financial corporations and households minus mortgages. In short, all the steps point to the ECB's effort to reignite activities in the still-suffering Euro bloc.
While the boost from this fundamental will be broad based, emerging nations or still laggard nations will benefit the most. Following the ECB decision, most of the emerging and still-underperforming European nations soared. For investors interested in participating in this rally, a focus on these Europe ETFs could be a way to tap the same broad trends (see all European Equity ETFs here).
Greece
Greece, the epicenter of the Euro zone debt crisis, is expected to come out of recession this year ending a six year long streak of recession. Fitch upgraded Greece's long-term credit rank one step to B with a stable outlook, though the rating is still reeling in the junk territory.
Fitch solely attributed improved fiscal efficiency to the upgrade. Now, the policy measures of ECB will bring more relief for this once shattered nation (read: 3 Country ETFs Hitting 52 Week Highs).
Investors can consider betting on the economy with The Global X FTSE Greece 20 ETF (GREK). The fund gained around 7.30% last week, suggesting that a strong positive shift in Greece is at hand.
The product tracks the FTSE/ATHEX Custom Capped Index and manages a small asset base of $265 million. The ETF has heavy exposure to the top three firms – Piraeus Bank SA, National Bank of Greece and Hellenic Telecom – that collectively make up 35% of total assets. The fund charges a fee of 65 basis points on an annual basis.
The product is also focused from a sector perspective, with financials (21.6%), consumer discretionary (19.9%) and consumer staples (15.15%) taking the three biggest spots. GREK currently has a Zacks ETF rank of 2 or Buy rating with a high risk outlook.
Spain
The Spanish economy has expanded the most in six years in the first quarter of 2014 by logging 0.4% growth. Like Greece, Spain also received an upgrade in credit rating from the S&P, which raised this Euro zone nation's long-term rating one notch to BBB, the second rung in the investment grade ladder.
Spain's government increased its expectations for economic growth this year to 1.2% from 0.7% previously while next year's growth projection has been lifted from 1.2% to 1.8%. As Spain recently fell into deflation, the ECB move should benefit the nation in a big way.
Spain can be played with iShares MSCI Spain Capped ETF (EWP), an ETF that primarily invests in large and mid-cap Spanish stocks. Two of its top three financial holdings – Banco Santander and BBVA –account for 34% of its total assets. Sector wise, financials dominates the fund, holding 48% of total assets. The $2.4 billion fund charges 0.48% for an expense ratio.
EWP gained 3.02% in the past five days. EWP currently has a Zacks ETF rank of 3 (Hold) with a high risk outlook (read: Is a Great Year Ahead for the Spain ETF?).
While these two Euro zone nations are direct beneficiaries of the ECB measure as both are en route to improvement but struggling with low inflation. There is another route through which investors can reap benefits. That is the emerging Europe route.
Poland
Poland – an emerging European nation – is among the few countries in Europe that managed to duck the European meltdown thanks mainly to its well-controlled financial system. Now that the ECB has come up with a new move, this emerging country has resurfaced as a wise bet in the emerging Europe space.
The recent move helped the nation's currency to strengthen with respect to the Euro. Also, Poland's economy grew 1.10% in the first quarter of 2014 indicating the best performance in the last eleven quarters.
Poland can be played with Shares MSCI Poland Capped ETF (EPOL) – the most popular fund targeted this market. With about $103.7 million in assets, the product tracks the MSCI Poland Investable Market Index, charging 61 basis points a year from investors.
With 44 stocks in its basket, this fund from iShares puts about 60% of its total assets in the top 10 holdings, suggesting high concentration risk. Financials actually make up roughly half of the portfolio. EPOL gained about 4.03% last week, while the product carries a Zacks ETF rank of 3 with a high risk outlook (read: Emerging Market ETFs: Any Bright Spots?).
Bottom Line
Though another emerging nation's currency, Turkey and their lira, gained against the Euro, so did the ETF covering the country, it is better to refrain from investing in Turkey ETF TUR as of now due to sky-high inflation and tight monetary policy which could cripple growth (read: Can the Turkey ETF Make New 2014 Highs?).
Instead, investors can bank on the afore-mentioned country ETFs which look well-positioned to benefit from the current situation in Europe.
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GLBL-X/F GREC20 GREK: ETF Research Reports
ISHARS-SPAIN EWP: ETF Research Reports
ISHARS-MS POLND EPOL: ETF Research Reports
ISHRS-MSCI TURK TUR: ETF Research Reports
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