Credit: Shutterstock photoEuropean investments had largely fallen off investors' radars following the end of the Greek financial crisis. The region of the world was mired in low-growth and with the lack of volatility after the Greek situation was temporarily fixed, it was a pretty sleepy area of the market that didn't exactly offer investors much in the way of return potential.
But with the surprising Brexit vote results, European ETFs have come back front-and-center for many investors. And with the shocking performances that many funds targeting that region saw in the immediate aftermath of the results, investors definitely need to brush up on the key points for the funds targeting this area of the globe.
So, before you make your next Brexit-focused trade, make sure to consider the five keys below which will help guide you through this tumultuous market:
All British ETFs Aren't the Same
Obviously, British ETFs stand to be most impacted by the removal of Britain from the EU and the ensuing turmoil that this shift is likely to bring. Already, the country has seen its markets rocked and its currency slump, as few are sure as to what will happen next for this market.
Easily the most liquid, and arguably best, way to play Britain through ETFs is with EWU a fund that has close to two billion in assets under management and average daily volume approaching five million shares. However, this isn't the only way to target the market as investors also have a small cap version ( EWUS ) which could be a bit more volatile, but also more focused on the domestic economy.
Additionally, there is a hedged currency product which could be a good option for investors who believe that more pound weakness is ahead, DXPS . This fund has outperformed its counterparts thanks to its hedge of the currency risk, and is likely to continue this track if trends continue. And lastly, while there is an AlphaDEX fund from First Trust ( FKU ) that targets this market, it has actually been an underperformer despite its attempt to find higher quality companies. It has actually crumbled more than EWU in the Brexit aftermath, and by a pretty wide margin too thanks to its extra exposure to the in-focus financial sector (see Beat Brexit-Induced Sell-Off Via These Inverse ETFs ).
Brexit is a Currency Story More Than Anything
While the broad market slump is notable in the equity world, the real pain has been felt in the currency markets. Actually, for U.S. investors, this has been the bulk of the losses when looking at the ETF market (read Pound ETF Plunges: More Sell-Off in the Cards? ).
Consider the following chart which pits EWU (unhedged), HEWU (hedged version of EWU), DXPS (currency-hedged and export/dividend focused), and the pound ( FXB ) in the immediate Brexit aftermath. As you can see, DXPS and HEWU are actually posting gains in the post-Brexit world, though both EWU and FXB are struggling.
In other words, British stocks haven't been hit that hard, it has really been the currency more than anything.
Watch Out for the PIIGS
The big risks right now are the major economies of Italy ( EWI ) and Spain ( EWP ). These funds have lost more than their British counterparts since the Brexit vote, largely thanks to a panic over if these countries were to eventually use the Brexit as a roadmap to leave the EU as well (read More Trouble Ahead for Italy and Spain ETFs? ). You can also throw the Greek ETF ( GREK ) into this batch as the fund lost about 20% of its value in two days following the vote, rekindling memories of their financial crisis.
Another ETF to watch is the Ireland ETF ( EIRL ), this fund was also hit hard by the Brexit vote, and it doesn't help that Ireland is the only country with a border with the UK. The nation's ETF is also heavily exposed to segments like basic materials which can be dicey in tumultuous times, while a focus on small and mid cap stocks doesn't help with volatility either.
Portugal ( PGAL ) has been the only PIIGS exception to this rule, and it has actually outperformed the UK ETF in recent trading. It is the only such member of the PIIGS bloc to do so, meaning that the group by and large isn't out of the woods yet.
Financials: The Real Trouble Spot
The financial sector of the European market was decimated in the immediate aftermath of the Brexit vote crisis. Not only is the future of many UK-based banks uncertain, but there is always the risk of trading desks being on the wrong side of these surprising results, a situation which could lead to some sluggish reports.
And worst of all, the flight to safety hurts banks even more. With rates in negative territory pretty much across the board for debt maturing in less than 10 years, it is a very difficult situation for banks, further compounding their short term problems (see UK Votes for Brexit: ETF Winners & Losers ).
No wonder EUFN , a financials-focused European ETF, has been so volatile lately, and has attracted so much trading activity. The fund has roughly half of its exposure in banks (with insurance making up another decent chunk), while it has nearly a third of its assets denominated in British pounds.
And with top ten holdings like Lloyds Banking Group (which lost roughly 30% in the immediate aftermath of Brexit), it shouldn't be a surprise that EUFN has seen a nearly 15% haircut in the two days after the vote, and could be a volatile ETF going forward as more is known about the real Brexit impact. Just take a look how it has done compared to U.S. financials lately for a great example of the volatility:
Holdings Are Key to Returns
And given these issues in financials, it is obviously important to consider what a country ETF actually holds. Many have big weights in either the financial segment, or often in areas like energy, consumer, or telecom too.
Take for example the Belgian ETF ( EWK ), a fund that has done far better than most in the European crisis. Well, if you take a look at the holdings, you'll see that roughly a fourth of the exposure goes to Anheuser-Busch, so not exactly an institution that will go under if Britain leaves the EU. Meanwhile, both Italy and Spain (EWI and EWP, respectively) have their top sectors as financials, further compounding their problems as of late (see Brexit Shocker Forces These European ETFs Over 10% Lower ).
So, sometimes you need to go beyond the headline country and ask what is in the ETF, as the answer here can often drive returns, and especially so in volatile times like these.
Bottom Line
There are a ton of ways to invest in Europe with ETFs, and in a post-Brexit world plenty of these funds will be volatile. No matter which ETF you choose though, just remember the keys above, as these will hopefully guide you and your portfolio through what looks to be a difficult stretch in what is a very uncertain Brexit aftermath.
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
ISHARS-UTD KING (EWU): ETF Research Reports
ISHARS-MS EU FN (EUFN): ETF Research Reports
GLBL-X/F GREC20 (GREK): ETF Research Reports
CRYSHS-BRI PD S (FXB): ETF Research Reports
ISHARS-BELGIUM (EWK): ETF Research Reports
ISHARS-ITALY (EWI): ETF Research Reports
ISHARS-SPAIN (EWP): ETF Research Reports
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
