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What Lies Ahead for German ETFs?

German businesses are really confident of the economic conditions impacting their businesses. Institute for Economic Research’s (Ifo) October reading for the business climate in the region increased to a record high of 116.7 compared with 115.3 in September.


The current conditions index increased to 124.8 compared with 123.7 in the previous month, while the expected conditions index increased to 109.1 compared with 107.5 in the previous month.


Economic Data


German GDP increased 2.1% year over year in the second quarter of 2017 compared with 2.0% in the prior quarter. Moreover, the International Monetary Fund (IMF) now expects Europe’s largest economy to grow 2% and 1.8% in 2017 and 2018, respectively.


Consumer prices in Germany increased 1.8% in September, unchanged from August and below a Bloomberg survey estimate of 1.9%.


The surge in business climate index was primarily driven by the impressive manufacturing data released earlier this week. Markit manufacturing purchasing managers index (PMI) increased to 60.5 in October, down 0.1 point from September but above a Reuters forecast of 60.2. The figure was close to the almost six-and-a-half-year high touched in September, which in turn made businesses more optimistic.


Risks Involved


Currency Risk


The German economy faces risks from a rising euro, as it will hurt export demand. The euro is up almost 12.3% against the dollar so far this year. Moreover, the markets are expecting the European Central Bank to announce the unwinding of its stimulus policy in its October meeting.


Political Risk


Germany has become prey to a lot of political uncertainty. Europe seems to be swinging to the right, as is evident from the recent elections results in Austria and Czech Republic. Czech Republic recently elected populist EU sceptic billionaire Andrej Babis to lead the country (read: Is Europe Swinging to the Right? ETFs in Focus).


In Austria, it is widely expected that elected chancellor Sebastian Kurz, in order to gain majority to form a parliament, will form a coalition with the far-right anti-EU Freedom party. Freedom party’s harsh stance toward the European Union (EU) will make it difficult for German chancellor Angela Merkel to work alongside French president Emmanuel Macron to secure further integration into the euro region.


Moreover, in the German elections, Merkel secured her fourth term as the country’s chancellor but her party, the Christian Democratic Union (CDU), witnessed its worst results since 1949. From the 2013 election, CDU’s share declined 8.5 points to 33%. The anti-immigration Alternative for Germany (AfD) secured 12.6% votes as Germans opposed Merkel’s friendly refugee policy and her handling of the 2015 migrant crisis. The rise of the AfD is a threat to pro-Europe Merkel.


Moreover, uncertainty surrounding the fate of Catalonia is weighing on European markets (read: Spain ETF Rallies as Independence Worries Ease).


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


iShares Currency Hedged MSCI Germany ETF HEWG


This fund is an appropriate bet for those looking to gain exposure to Germany without betting on the euro and is the hedged version of EWG. We believe it is best to remain hedged to the currency till political uncertainty in the region is dealt with.


HEWG has AUM of $681.5 million and charges 53 basis points in fees per year. Consumer Discretionary, Financials and Materials are the top three sectors of this fund, with 18.3%, 15.3% and 14.4% allocation, respectively (as of Oct 24, 2017). The top three holdings of EWG are Bayer AG, SAP and Allianz with 7.9%, 7.7% and 7.4% exposure, respectively (as of Oct 24, 2017). HEWG has returned 11.5% year to date and 18.3% in a year (as of Oct 25, 2017). As such, HEWG currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


WisdomTree Germany Hedged Equity Fund DXGE


This fund seeks to provide exposure to German equities without betting on the euro.


DXGE has AUM of $116.1 million and charges 48 basis points in fees per year. Consumer Discretionary, Industrials and Financials are the top three sectors of this fund, with 23.5%, 18.3% and 17.1% allocation, respectively (as of Oct 25, 2017). From an individual holdings perspective, Allianz SE, Daimler AG and BASF SE are the top three holdings of the fund, with 6.8%, 6.0% and 5.9% allocation, respectively (as of Oct 25, 2017). It has returned 11.8% year to date and 19.8% in a year (as of Oct 25, 2017). As such, DXGE currently has a Zacks ETF Rank #3 with a Medium risk outlook.


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WISDMTR-GER HEF (DXGE): ETF Research Reports
 
ISHA-CH MS GERM (HEWG): ETF Research Reports
 
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