ETFs for Europe Speculations
Hardly a day passes without some news from Europe these days that could potentially move markets.
Whether it's Greece backing down on a holding a referendum, Italy's Berlusconi finally resigning, or EFSF buying its own bond due to lack of demand, there's no shortage of drama for the saga.
To speculate on Europe's pain, or its occasional relief, there are three main instruments:
- Currency
- European Bonds
- European Stock Indices
Currency
EUR/USD is the most actively traded currency pair in the foreign exchange market, which is undoubtably one of the most liquid markets that ever existed. Leverage is widely used in trading forex, and margin requirement is necessary in almost all forex accounts. Because of this, many traders who stick with stocks never venture to the forex market.
However, for those who had lost faith on the Euro, they can consider shorting the CurrencyShares Euro Trust (NYSE: FXE). In fact, currency pairs ranging from the Japanese Yen to Swiss Franc are readily available in many ETFs or ETNs. Even China's Yuan, or RMB for RenMinBi, can be traded through the Market Vectors-Renminbi/USD ETN (NYSE: CNY). Also, for additional leverage, one can look into the 2x ETF funds such as the ProShares UltraShort Euro ETF (NYSE: EUO).
European Bonds
Bond trading is usually handled by special bond desks in a brokerage firm. They are traded mostly by institutional investors, and the size for each trade is much larger. International bonds are much more specialized, and not many brokerage firms offer them to retail investors.
However, there are some European bonds ETFs that investors can use for speculation. One of them, the PowerShares DB Italian Treasury Bond Futures ETN (NYSE: ITLY), has attracted quite a few speculators lately because of the rising bond yields on Italy's bond. Other European bonds include the Pimco Germany Bond Index Fund (NYSE: BUND) and the PowerShares DB German Bond Futures ETN (NYSE: BUNL).
European Indices
Last but not least are the tracking ETFs for various European stock indices. There's the iShares MSCI Germany Index Fund (NYSE: EWG) for Germany, the iShares MSCI Italy Index Fund (NYSE: EWI) for Italy, and the iShares MSCI Spain Index Fund (NYSE: EWP) for Spain, etc. A list of European indices ETFs can be found here.
Investors must be aware that many specialized ETFs are thinly traded, and thus liquidity can be an issue. There are also fundamental differences between ETFs (Exchange Traded Funds) and ETNs (Exchange Traded Notes), as ETNs are special investment vehicles usually issued by financial institutions. Therefore, if the issuing financial institution of the ETN falls, investors may have difficulty in recouping their investments. In this case, investors must be aware of the counter-party risks they have, a term we learned too well from the downfall of AIG (NYSE: AIG).
