C'est La Vie: Election Focus On France ETF

February 9, 2017 2:04 pm
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C'est La Vie: Election Focus On France ETF

Heading into this year, global investors were acutely aware of the potential for eurozone political volatility as several of the region's largest economies hold national elections this year. For example, Germany and France, the two largest eurozone economies, head to the polls in elections that could extend the liberalism vs. populism theme.

These elections and others are relevant to U.S. investors holding Europe exchange-traded funds. Diversified Europe ETFs, meaning those that hold eurozone economies as well as exposure to countries such as the U.K., Sweden and Switzerland, often feature combined allocations to France and Germany in excess of 20 percent.

Political Influences, ETFs And The Eurozone

Dedicated eurozone ETFs, such as the SPDR EURO STOXX 50 ETF (NYSE:FEZ), feature substantially higher combined France and Germany weights. In the case of FEZ, that ETF devotes about 70 of its lineup to French and German shares. That has made FEZ a popular destination for professional traders looking to hedge French election volatility.

“Bears are targeting a U.S.-listed exchange-traded fund that follows euro-area equities. A record 95,350 put options on the SPDR Euro Stoxx 50 ETF changed hands on Friday as a trader bought 45,000 March/May $33 put spreads on the security, which is mostly composed of French stocks,” reported Bloomberg.

Interestingly, the iShares MSCI France Index (ETF) (NYSE:EWQ) has been mostly docile this year. The largest France-specific ETF trading in New York is down less than half a percent year-to-date. To its credit, EWQ has seen inflows of just over $20 million. That is two and a half times the $8 million that has flowed into the iShares MSCI Germany ETF (NYSE:EWG).

Looking To Le Pen

Investors are right to wonder for how long will EWQ remain calm. The ETF has a three-year standard deviation of 14.8 percent, which is slightly below the 14.9 percent found on the MSCI EMU Index. Still, this French election is not free of controversy and that could controversy is likely to increase if far-right candidate Marine Le Pen advances to the May run-off.

Le Pen faces a challenge to ultimately emerging victorious.

“Will require a drop in voter turnout to below 40 percent in the second round of French Presidential elections for Le Pen to become president, which has never been seen in history for any election. Otherwise, her voter will have to triple from the December 2015 figure of 7 million,” according to Goldman Sachs data highlighted by Rareview Macro founder Neil Azous in a note out Wednesday.

Image Credit: Marine Le Pen – “Convention présidentielle du Front national”, 25 février 2007, Lille / France By Antoine Bayet – http://www.flickr.com/photos/politiqueaunord/402110367/, CC BY-SA 2.0, via Wikimedia Commons

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