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Checking In: The Other Way to Germany (EWG, FGM, EWGS)

May 15, 2012 12:35 pm
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When it comes to ETFs devoted to Germany, the Euro Zone’s largest economy, there’s just four on the market today, a number that some might consider to be small given the importance of this country on the global economic stage. Or it can be said that four is enough, but that the assets certainly aren’t spread out too well.

The iShares MSCI Germany Index Fund (NYSE: EWG), which debuted in March 1996, is the oldest and largest Germany ETF. EWG tracks 52 stocks and has over $2.5 billion in assets under management, a number that is significant enough to potentially keep rivals at bay and ensure other Germany ETFs may slip through the cracks.

One Germany-specific ETF that has gone unnoticed, and we’re not saying that’s a good thing, is the First Trust Germany AlphaDEX Fund (NYSE: FGM). The First Trust Germany AlphaDEX Fund debuted on Valentine’s Day and has managed to attract little in the way of investor love. Maybe it’s because the Euro Zone is a mess right and investors are even running away from Germany. Or maybe it’s because FGM charges 0.8% compared to just 0.51% for EWG. Whatever the reason, the First Trust offering has stumbled out of the gate, at least in terms of superficial metrics such as AUM and average daily volume (less than 100 shares).

Speaking to the points of volume and FGM’s anonymous status, it must be noted that near as we can tell, the new Germany fund hasn’t traded since April 24. That’s surprising if for no other reason than that the Euro Zone’s calamity has escalated. Figure it this way: Since April 24, France has elected a new socialist president and Greece has tried and failed to form a new coalition government. It would be logical to assume these headlines would spark some interest in FGM, but that has not been the case.

It is the lack of interest in FGM to this point that belies the two most important factors about the fund: Its returns and how it generates those returns. While FGM and EWG are both passively managed, the AlphaDEX methodology employed by First Trust can lead to important and profitable differences over rival funds.

FGM’s index employs the AlphaDEX stock selection methodology which uses fundamental growth and value factors to objectively select stocks from the S&P Germany BMI universe which may generate positive alpha relative to traditional passive indices. The index is a modified equal-dollar weighted index where higher ranked stocks receive a higher weight within the index, First Trust says in FGM’s fact sheet.

Said another way, most traditional ETFs are weighted by the market value of their constituents, but FGM employs a quality scree so the highest quality, not always the largest, stocks receive larger allocations within the fund.

Obviously, there’s going to be some overlap in terms of holdings between the FGB and EWG. Both funds offer heavy exposure to German large caps and that means Deutsche Bank (NYSE: DB), SAP (NYSE: SAP), BMW and Volkswagen, among others, appear in both funds.

The bottom line is this: Including the Market Vectors Germany Small-Cap ETF (NYSE: GERJ) and the iShares MSCI Germany Small Cap Index Fund (BATS: EWGS), there are four Germany ETFs trading in the U.S. today. FGM wins the silver medal, barely trailing EWGS. Of course, the more natural comparison is against EWG. That fund is down almost 9.4% compared to a less than 3.4% decline for the First Trust fund. Obviously, index methodology is playing a part in that performance and that is something investors cannot afford to overlook.

For more on Germany ETFs, please click HERE.

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