Five ETFs Vulnerable To Credit Ratings Downgrades

After being caught sleeping before the financial crisis, ratings agencies, Moody's and Standard & Poor's in particular, are attempting to show they're on top of things in 2011. Whether or not the ratings agencies are ahead of the curve this time around is debatable, but we know this much: Moody's, S&P and Fitch have lowered their credit ratings on Spain and it can be said a lot of other Euro zone countries either have or will eventually suffer the same fate.Downgrades from ratings agencies can be meaningful events for ETF investors. The key is knowing in advance of the downgrade which funds are looking vulnerable. Let's shed some light on that topic right now with some ETFs that remain vulnerable to ratings agency downgrades.iShares MSCI Spain Index Fund (NYSE: EWP) & iShares Italy Index Fund (NYSE: EWI):No need to split these two up as they're basically suffering the same fate at the hands of Moody's S&P and friends. As we just said, Spain's credit ratings have been pared by all three major ratings agencies. Moody's pared Italy's debt rating earlier this month and S&P slashed its ratings on 24 major Italian banks yesterday. That's bad because financials account for almost 29% of EWI's weight.iShares MSCI European Financials Index Fund (Nasdaq: EUFN):For some reason, the chart of the iShares MSCI European Financials Index Fund looks better than it should. However, the primary question one needs to ask is: “Do I really want exposure to 108 European banks at one time when I probably shouldn't have exposure to any?” EUFN is a short below $14.iShares MSCI Japan Index Fund (NYSE: EWJ):Moody's lowered its rating on Japanese debt in August, citing ballooning deficits and weak economic growth outlooks. The problem for EWJ and any other Japan-specific ETFs for that matter is those issues have been around for a decade, maybe longer, and they show no signs of abating. That means more downgrades could be in store for Japan.Vanguard European ETF (NYSE: VGK):Parsing through the individual holdings of the Vanguard European ETF, there are actually a lot of stocks to like, but with “European” in its name the ETF is vulnerable to negative actions by ratings agency. With this country lineup it's easy to see why: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. What we're seeing is VGK offers exposure to 16 countries. The PIIGS, five of the ETF's countries, remain vulnerable to downgrades. French banks have been downgraded. Belgium is on credit watch. Frankly, only the Nordic countries, Germany, Switzerland and the U.K. look safe for now.Oil Services HOLDRs (AMEX: OIH):What? The Oil Services HOLDRs makes a list of ETFs that could be hurt credit downgrades? Let's explain why: OIH has the largest exposure to Transocean (NYSE: RIG) of any ETF. The world's largest provider of offshore drilling services saw its ratings pared by Fitch in August on news of the Aker deal, but the real issue is Transocean's financial liability for the Gulf of Mexico oil spill.Think of that scenario this way: Anadarko Petroleum (NYSE: APC) announces earlier this week it's settling with BP (NYSE: BP). Anadarko shares surge and get a ratings from S&P on Tuesday. If Transocean opts to keep fighting BP and court and loses, the stock will likely plunge and the ratings agencies will be out for blood. Due the opposite and settle, and Transocean shares probably do what Anadarko's did earlier this week.