ETFs To Avoid Until The Libya Mess Gets Sorted Out

The ongoing saga in Libya has had predictable results on a predictable group of ETFs. Oil futures have been surging to the benefit of ETFs such as the U.S. Oil Fund USO while ETFs that track the Middle East, such as the Market Vectors Gulf States Index ETF MES and the WisdomTree Middle East Dividend ETF GULF, have been hammered despite offering no direct exposure to Libya. Beyond the obvious suspects, there are several other ETFs to avoid from the long side until tensions in Libya subside and the reasoning behind avoiding these ETFs exposes a flaw in how many ETFs are designed: They allocate too much of their weight to just a few stocks, or in some cases, just one stock. Here's our list of ETFs that are being hurt by Libya and why to avoid them. 1) iShares MSCI Italy Index Fund EWI Avoid because: EWI makes the classic country-specific ETF mistake in that over 18% of its weight is allocated to Eni E, Italy's largest oil company. Italy has been operating in Libya for over five decades and has the largest footprint there of any Western oil major. Those aren't selling points these days. 2) iShares MSCI Spain Index Fund EWP Avoid because: We'll give EWP some slack as Repsol YPF REP, Spain's largest oil company, accounts for just 5.3% of this fund's weight, but that's enought to make it EWP's third-largest holding. The company said Tuesday it was halting its Libyan operations and EWP fell, perhaps partially due to that news. 3) Global X Norway ETF NORW Avoid because: Same reasoning as with EWI. Statoil STO, Norway's largest oil company and 19% of NORW's weight, halted Libyan operations earlier this week and evacuated staff from the country. 4) WisdomTree International Energy ETF DKA Avoid because: Eni, Repsol and Statoil are all found in the top-10 holdings and because Royal Dutch Shell RDS and Total TOT, Europe's largest and third-largest oil companies, respectively, also have Libya exposure and account for over 21% of DKA's weight.