With the Spanish economy seemingly sinking back into the abyss,
many investors have stayed focused on the nation as a barometer for
broad euro zone troubles. However, issues are also starting to
build in an even bigger country in the euro zone, which could make
Spain’s problems look small in comparison.
That nation is Italy, one of the ten largest economies on earth
with a total GDP of about $1.8 trillion, a level that is roughly
$400 billion greater than Spain. In other words, the difference
between the Spanish and Italian economies’ size is about $100
billion more than the entire Greek economy (read Pain In The Spain
ETF Continues).
Thanks to this, the Italian economy is a behemoth among PIIGS
nations and is likely to eventually set the pace in terms of
worries over the bloc. This suggests that while the focus may be on
Spain right now, it will eventually shift to Italy, especially if
current troubles in the country continue (see more in the
Zacks ETF Center).
This is because Italy appears to be falling back into a low
growth, high unemployment quagmire, much like its counterparts in
the space. In fact, unemployment is the country is now at a 12-year
high—nearly 10%-- while the nation is currently fighting through
its fourth recession since 2001, according to Bloomberg.
Given these figures, as well as some gloomy predictions from
government officials regarding the pace of recovery and job growth,
and it appears as though Italy could be stuck for quite some time.
Unfortunately, this disappointment is beginning to be reflected in
the country’s stock market, as evidenced by the weak performance
from the main equity way to play the country in basket form; the
iShares MSCI Italy Index Fund (EWI).
The popular ETF tracks the MSCI Italy Index and surged to start
2012, adding over 10% in the first month of the year. However, as
troubles have begun to build in recent weeks, the product has
slumped back to earth and is now flat on the year, including a
nearly 8% loss in the past month alone (read Three Unlucky Equity
ETFs).
As a result, EWI is now dangerously close to its 52 week lows,
representing a huge slump from the fund’s position just a year ago.
In fact, the ETF has lost close to 40% of its value in the past
year, a nearly 1,000 basis point underperformance when compared to
the broad-based iShares MSCI EMU Index Fund (EZU)
over the same time period.
Sector Troubles As Well?
Beyond the impressive structural problems facing the Italian
economy, the Italy ETF isn’t exactly helped by its sector breakdown
either. The ETF only holds 30 components in total and a whopping
72% of assets go to the top ten holdings alone, suggesting high
levels of company specific risk.
This issue is further compounded by the single security
allocations that are in the top few holdings of the ETF as the
three biggest firms account for more than 47% of assets. In fact,
ENI SpA (E) makes up over 23% of the total assets,
giving the fund a heavy allocation to the energy industry as
well.
Overall, 33% of the fund goes towards the energy sector, 26% to
financials, and 19% to utilities. Given the focus on the low growth
segment of utilities, the heavy exposure to E in the energy space,
and the nearly one-quarter assets in the deeply troubled financial
sector, and it shouldn’t be too hard to see why the fund is having
trouble from this view either (see 11 Great Dividend ETFs).
This heavy concentration also means that a number of segments
are smaller than you might expect or completely absent from the
fund all together. Only three other sectors even find their way
into the product while companies in the technology, consumer
staples, basic materials, and health care industries receive no
allocation whatsoever in the Italian ETF.
Clearly with this heavy concentration in just a small number of
companies in a few sectors, EWI can be very susceptible to adverse
events in a few corners of the market. While the energy sector has
held up rather nicely, the huge banking sector has not, dragging
down the rest of EWI in the process.
The two biggest financial stocks in EWI—Intesa Sanpaolo SpA and
UniCredit SpA—are down, respectively, 14% and 52% so far this year,
creating a poor backdrop for this European ETF in 2012, especially
considering that these two financials account for nearly 13% of
total assets in the product.
In other words, EWI is probably an ETF that you want to stay
away from for the foreseeable future. Yes, the product is beaten
down and may be a decent value for longer term investors, but the
trend to downside seems like it will be hard to shake.
The Italian economy is extremely weak and with the continued
budget cuts and broad euro zone slowdown, this trend could easily
extend into the summer. Furthermore, the fund breakdown isn’t
exactly favorable and the product is heavily concentrated in a few
securities, far beyond what investors see in similar country
specific ETFs in the region (also read For Europe ETFs, It Is Hard
To Beat Switzerland).
This suggests that the product isn’t even that good from a
diversification perspective and that those seeking to make a long
bet on the euro zone would be better served by looking elsewhere.
As a result of both the weak Italian economy and the poor structure
of the product, we see no reason why EWI could not test its 52 week
lows at some point in this quarter.
The European mess doesn’t look likely to be solved at any point
in the near future, and eventually the focus will shift to Italy
and EWI, implying another rough patch is ahead for investors in
this concentrated product.
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30
Days. Click to get this free report >>
ENI SPA-ADR (E): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days. Click
to get this free report
iShares MSCI Italy ETF (AMEX:EWI)
Historical Stock Chart
From Jul 2024 to Jul 2024
iShares MSCI Italy ETF (AMEX:EWI)
Historical Stock Chart
From Jul 2023 to Jul 2024