With Spain the latest euro zone member to inspire fear among
sovereign bond investors, exchange-traded funds that invest in
the countrys equities are seen as a profitable means of
shorting its debt.
Daniel Sckolnik, a senior analyst for Santa Barbara,
Californiabased research firm Sabrient Systems, cited
three ETFs in a recent Periscope column in its weekly
investment newsletter: VGK (MSCI European ETF), IEV (iShares
S&P 500 Europe 350 Index Fund) and, as Sckolnik put it,
for those who want to go for a more laser focus,
EWP (iShares MSCI Spain Index Fund).
But even the purest ETF play here isnt as
straightforward as it sounds, as a piece by Michael Johnston on
the ETF Database website recently pointed out.
The two largest holdings of EWP are Banco Santander (at 20
percent of the portfolio) and Telefónica (at 18
And both of those companies count on Brazil for a big chunk
of earnings and an even larger portion of growth, and that
emerging market is not at all correlated to Spain.
Observed Johnston, Spain is still a key market, but
hardly the only driver of those two companies (and therefore
the entire ETF).
In an interview with Institutional Investor,
Sckolnik countered: Its not really diversified.
Just look at its performance to date.
In fact, it may seem a bit late in the game for this move.
EWP is trading at $25.64 as this went to press, close to a
52-week low, and 61 percent off its high of $42.02.
Yet Sckolnik doesnt think all of the potential bad
news is already reflected in the ETFs price,
notwithstanding the support the European Central Bank has been
offering all of the euro zones troubled economies.
As he put it in his column: Anyone who has bought into
the notion that the structural problems of [the] monetary union
have been addressed with the Europe Central Banks own
version of quantitative easing ... may be surprised when the
next round of serious problems breaks out among the PIIGS
(Portugal, Ireland, Italy, Spain and Greece) in 2012.
Sckolnik is even more explicit in his interview, The
austerity measures will not be able to be implemented,
theyre going to break promises already made, investors
will be spooked, and the euro zone will sink further into
As to the question of whether EWP has further to fall,
Sckolnik says, The answer is yes.