Does Losing AAA Credit Mean Much to Europe ETFs?
Last Friday, the U.K. became the latest country to lose the prestigious AAA credit rating when Moody's Investors Service downgraded the kingdom to Aa1, citing sluggish economic growth and a growing debut burden.
The U.K., the world's sixth-largest economy, according to the CIA World Factbook, is not alone in having lost the AAA rating. Recent departures include Austria and France as well as the U.S. in 2011. Do not bet on any of those countries or any of the others that have lost the perfect rating to get it back anytime soon.
Canada lost its AAA rating from Standard & Poor's in 1992 and could not get it back until 2002, The Independent reported. Australia lost its AAA rating in 1986 and did not get it back until 2003, according to the paper.
While one issue has nothing to do with the other, as developed world government balance sheets have deteriorated, the ETF industry has grown. That means there are plenty of country ETFs with which to measure the impact of the loss of the AAA credit rating. Investors in the iShares MSCI U.K. Index Fund (NYSE: EWU) will want to have a look at the following.
Note this list looks at the performance of select Europe ETFs following the first loss of the AAA rating. For example, if Moody's downgraded the country in January, but Standard & Poor's followed in April, this list measures the performance of the ETF from the first downgrade.
iShares MSCI France Index Fund (NYSE: EWQ) S&P stripped France of the AAA rating in January 2012 while Moody's chimed in on the Eurozone's second-largest economy in November of that year.
EWQ, the lone France ETF, gained almost 10 percent in the month following the S&P downgrade, but three months later the ETF was barely in the green. Six months following the S&P downgrade, EWQ had lost 3.73 percent. On the bright side, EWQ has jumped 6.3 percent in the past year.
iShares MSCI Austria Capped Investable Market Index Fund (NYSE: EWO) S&P took Australia's AAA rating from Austria at the same time it took the stellar rating from France. However, the immediate performance of the iShares MSCI Austria Capped Investable Market Index Fund might deceive some investors into thinking the headlines did not matter. About 11 weeks following the news, EWO had surged nearly 19 percent.
The gains quickly wilted, though. A month later, EWO's post-downgrade gain was just 10.8 percent. Six months removed from the loss of the AAA rating, EWO was trading where it was pre-downgrade. To be fair, EWO, like EWQ, trades at much higher prices today than where it did before and in the months immediately following the loss of AAA credit.
iShares MSCI Spain Capped Index Fund (NYSE: EWP) The performance of the iShares MSCI Capped Index Fund in the wake of Spain no longer being an AAA nation is arguably a case of good and bad timing. S&P made the call in early 2009, at the height of the global financial crisis. However, the ETF was then positioned to take advantage of the March 2009 market bottom.
To that end, EWP was up more than 13 percent 90 days after the downgrade. Six months later, the ETF was up nearly 40 percent. Proving that all good things must come to an end, Spain's problems proved too much for EWP to handle over the past couple of years and EWP is now found residing at almost exactly the same price as where it traded a day after Spain ceased being an AAA country.
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