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German Business Confidence Hits Record High: ETFs to Buy

Business Confidence in Germany, the largest country in Europe, hit a record high in July 2017, hinting at the optimism in the country’s businesses. It increased to 116 in July compared with 115.2 in June, the highest since 1991. It also beat a Reuters consensus forecast of 114.9.


The rise in optimism is primarily being attributed to a surge in domestic consumption due to declining unemployment and an increase in exports. The jobless rate is still at a record low of 5.7%. This presents a case for stronger spending and growth.


The index, measured by the Institute for Economic Research (Ifo), is a survey conducted by involving around 7,000 businesses in Germany panning across construction, wholesale and retail industries.


The index is reported on a monthly basis and is based on the current situation as well as the outlook for the next six months. Ifo’s measure for the current situation increased to 125.4 from 124.2 in the last month, while its measure for future outlook increased to 107.3 from 106.8 in the last month.


Earlier this month, Germany released its industrial output data. German factory orders increased 1% in May 2017 compared with a decline of 2.2% in April. On a year-over-year basis, it increased 3.7% compared with a 3.3% increase in April 2017 (read: German Factory Orders Rise: ETFs to Buy).


The positive economic data is a blessing for Angela Merkel, as she seeks a fourth term as chancellor of Germany. Germans go to polls in September and stronger confidence in the current setting is a positive for Merkel.


Per the International Monetary Fund (IMF), German economy is expected to grow 1.8% and 1.6% in 2017 and 2018, respectively.


Although, ECB President Mario Draghi hinted that the stimulus program will be required for a long time, the market ignored the dovish tone and continued to bet on the euro. The euro surged to a two-year high against the greenback (read: Euro at 2-Year High: ETF Winners & Losers).


Although the euro’s strength is seen as a drag on export growth, the fundamentals of the German economy remain strong.


Let us now discuss a few ETFs that are primarily focused on providing exposure to German equities (see all European Equity ETFs here).


iShares MSCI Germany ETF EWG


This fund is an appropriate bet for investors looking to gain exposure to German equities while also betting on the euro.


EWG has AUM of $5.11 billion and charges 48 basis points in fees per year. Consumer Discretionary, Financials and Materials are the top three sectors of this fund, with 17.87%, 15.65% and 14.15% allocation, respectively (as of July 24, 2017). The top three holdings are Bayer AG, Siemens AG and SAP, with 8.09%, 7.83% and 7.67% exposure, respectively (as of July 24, 2017). EWG has returned 15.63% year to date and 21.03% in the last one year (as of July 25, 2017). As such, EWG currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.


First Trust Germany AlphaDEX Fund FGM


This fund seeks to provide exposure to German equities while leaving the currency exposure unhedged.


FGM has AUM of $184.98 million and charges 80 basis points in fees per year. Industrials, Consumer Discretionary and Real Estate are the top three sectors of this fund, with 24.01%, 23.02% and 16.36% allocation, respectively (as of July 24, 2017). From an individual holdings perspective, Aurubis AG, Rheinmetall AG and KION Group AG are the top three holdings of the fund, with 4.29%, 4.26% and 4.18% allocation, respectively (as of July 24, 2017). It has returned 21.68% year to date and 22.11% in the last one year (as of July 25, 2017). As such, FGM currently has a Zacks ETF Rank #2 with a Medium risk outlook.


Let us now compare the performance of these funds to a broad Europe based ETF, FEZ.


SPDR Euro STOXX 50 ETF FEZ


This fund is appropriate for investors looking to gain diversified exposure to equities of the euro zone.


It has AUM of $4.23 billion and charges 29 basis points in fees per year. The fund has a 35.88% allocation to France, 32.73% to Germany and 10.82% to Spain (as of July 24, 2017). From a sector look, Financials, Industrials and Consumer Discretionary are the top three allocations of the fund, with 22.90%, 14.28% and 11.15% exposure, respectively (as of July 24, 2017). Total SA, Siemens AG and Sanofi SA are the top three holdings of the fund, with 4.54%, 4.24% and 4.02% exposure, respectively (as of July 24, 2017). The fund has returned 17.81% year to date and 22.50% in the last one year (as of July 11, 2017). It has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: France to Introduce Tax Cuts: ETFs to Buy).


Below is a chart comparing the year-to-date performance of the three funds.


 
Source: Yahoo Finance


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SPDR-EU STX 50 (FEZ): ETF Research Reports
 
ISHARS-GERMANY (EWG): ETF Research Reports
 
FT-GERMANY (FGM): ETF Research Reports
 
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