EWG: Time For This Top Ranked German ETF?

The euro zone has finally broken free from a two-year recession with Germany leading the recovery. Germany – the heart of the euro zone – has easily endured the recent turmoil in European markets, and is well-positioned for further gains.

In the third quarter of this year, Germany grew 0.3% meeting the GDP estimates. Although the rate was down quarter-over-quarter, it was higher than that of many Eurozone countries. German economic growth nudged up 0.7% in the second quarter over a mere 0.1% increase recorded in the first three months.

Improvement in investments and consumption helped Germany stand out in the euro zone. Other economic indicators also speak in favor of the country’s brighter prospects.

Thanks to the European Central Bank’s rock bottom interest rate policy, industrial activity in Germany has also perked up with industrial orders increasing at a quicker pace than it was estimated in September. Exports also gained strength as the trade surplus was shooting up to 20.4 billion euro in September on top of 13.3 billion recorded in the prior month.

The inflation rate was contained at 1.20% as of October. Also, a shrinking unemployment rate, all-important lower government deficit, well-equipped infrastructure and a stable government are aiding the country’s growth.

The best part is that despite the long streak of debt crisis, the country has ‘triple A’ credit ratings from S&P and Fitch indicating a stable credit outlook. All these culminated to a general optimism in the country. The growing appetite for German stocks sent Deutsche Borse AG German Stock Index DAX to a rally with around 20.0% gain in the year-to-date frame (as of November 15, 2013).

In fact, citing the slow but steady run in the initial phase of the year, we expect the German economy to become stable in the near future. Though the broad-based recovery is still faltering, the German economy is definitely heading in the right direction.

Germany thus appears to be a safe and lucrative bet in the Europe. A look at some of the top ranked Germany-based ETFs could be a good way to target the best that the country offers. In order to do this, investors can look at the Zacks ETF Rank and find the top German ETF.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (Read: Zacks ETF Rank Guide). Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the European equities space, we have taken a closer look at the top ranked EWG. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ (see the full list of top ranked ETFs) and is detailed below:

EWG in Focus

Launched in March 1996, iShares MSCI Germany ETF (EWG) is a passively managed exchange traded fund looking to deliver the return of the capitalization-weighted MSCI Germany Index.

The fund is one of the most popular in the Europe equities space with more than $5.0 billion in assets. With a huge trading volume of around 3,000,000 shares a day, the fund provides investors ample liquidity.

The choice is also a cheaper one as it charges 49 basis points in fees a year which is quite below the average expense ratio in the Europe equities space. In fact, higher trading volume led to relatively lower expenses.

With 54 stocks in its basket, this fund from iShares puts as much as 59.95% of its total assets in the top 10 holdings, suggesting high concentration risk. Top companies include Bayer AG, Siemens AG and BASF SE, all of which account for more than 8% of the assets.

In terms of sector exposure, consumer discretionary (20.57%) and financials (16.81%) get considerable allocation in the fund, while industrials (14.46%) and materials (14.15%) round out the top four. Telecommunication (3.91%) and consumer staples (4.34%) get the least weight.

Style-wise, growth funds account for only 37% of the portfolio while value takes the crown with 57% exposure keeping a lid on the fund’s risk profile. As much as 85% focus on large caps also calls for lower volatility.

EWG has returned a handsome 25.6% roughly in the last one-year period ended September 30, 2013. The fund is currently hovering near its 52-week high level. EWG pays out a yield of 1.50% per annum.

Bottom Line

EWG could be a winner as the underlying country has set its foot on the growth path and still remains undervalued. Just one word of caution, the fund is unhedged, making it vulnerable to any weakness in the Euro and how it trades against the dollar (read: WisdomTree Launches Germany Hedged Equity ETF)..

Though, with the current market path, we don’t anticipate this being too much of an issue in the near term, so EWG may be a solid pick for those seeking a fresh European ETF play to close out the year.

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