By Eric Dutram of ETF Database
With continued worries over budget crises in the "PIIGS" (Portugal,
, Ireland, Greece and
) and their rapidly deteriorating fiscal conditions, the future of the eurozone's common currency has been called into question.
Most of attention has focused on Greece, where double-digit budget deficits threaten to grind the government to a halt and spread throughout the region.
While some are pushing for a Greek bailout, others worry about the signal this action might send to other troubled economies across the Mediterranean.
Greece's richer counterparts certainly aren't happy about the idea of a bailout, especially
of respondents to a recent poll demanded that Greece be thrown out of the eurozone if it can't solve its problems without outside funding.
Some are even calling for the
end of the euro
or are pushing for stronger members, such as
and Germany, to leave the common currency before it drags down their economies too.
On the other end of the spectrum, some economists have proposed that weaker countries, such as Spain, could actually benefit from leaving the eurozone. Such a move would permit a devaluation that would instantly increase global competitiveness and spur the national economy.
All of these concerns have chipped away at the value of the euro since it hit a 52-week high of $1.51 in late November. In fact, the euro has lost more than 10% against the dollar since the beginning of the year.
Although there are some obvious beneficiaries to a weak euro, such as
PowerShares DB USD Index Bullish Fund
, weakness in the currency could potentially impact several other ETFs as well.
Below, we highlight five ETFs that could be affected by the euro's future.
iShares MSCI Germany Index Fund
As the second largest exporter in the world and by far the largest exporter in the European Union, Germany stands to greatly benefit from a weaker euro. As the French finance minister recently pointed out, a weak euro
is good for exporters
, and Germany's inclusion in the eurozone has likely prevented exports from becoming uncompetitive in the global markets.
EWG contains 51 firms that are based in Germany. Some of its largest holdings are industrial giants and exporters.
(9.9%), pharmaceutical giant
(6.9%) all have big allocations in the fund. The largest sector represented is
at 18.6%, but industrials, materials and consumer discretionary firms combine to make up nearly 40% of the fund.
Claymore/NYSE Arca Airline ETF
Many destinations in Europe are among the most popular in the world for tourism, and a weak euro makes sightseeing in Paris or Rome much more attractive to American consumers. A stronger dollar could also slice into
, which would boost profits for airlines.
One option to play this trend is FAA, which focuses on passenger airlines around the world. Even though the fund has allocations to European and Asian airlines, the vast majority of its assets, 75%, are in American airlines that could benefit from a cheaper eurozone.
iShares Barclays 20 Year Treasury Bond Fund
Recently, there has been talk of sharply
below its current rating of BBB-plus. This could push Greek debt below the investment grade threshold, which would have a devastating effect on interest rates in Greece.
If the trouble spreads to other, larger countries, such as Italy and Spain, it could further drag down the euro and make investors wary of investing in euro-denominated bonds. This could cause an exodus from EU bonds for the relative safety of U.S. Treasuries.
TLT focuses on long-term treasury bonds, which in addition to benefiting from potential deflation (see
) stand to gain the from increased fears over the state of the eurozone. Of course, TLT and other long-term bond ETFs will also be impacted (perhaps more significantly) by the
Claymore/Robb Report Global Luxury Index ETF
A falling euro makes goods from Europe less expensive in foreign currencies, which will make it easier for consumers, especially in North American and emerging Asian countries, to
consume luxury goods
This could boost sales for the many luxury firms that are based in continental Europe, particularly those that generate a major portion of their revenue from overseas. ROB focuses on these luxury goods with a global scope, holding 32 different securities, the vast majority of which are in the
. As far as European holdings go, ROB has 27.9% in France, 12% in Germany and 7% in Italy. With emerging Asian consumers and a weaker euro making the products of nearly 45% of this fund's holdings cheaper, the future could be bright for ROB and its European exporters.
IQ ARB Merger Arbitrage ETF
When the euro was strong relative to the dollar, we saw a slew of
from European companies, such as the acquisition of Anheuser-Busch by
A strong dollar may result in a reversal of this trend that will see a wave of U.S. buyouts of European companies (
plan indicates this may already be under way).
If M&A activity does ramp up, MNA could become an interesting play. This ETF seeks to achieve capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer. The fund does this by owning certain announced takeover targets, with the goal of generating returns that are representative of global merger arbitrage activity.
In addition, the fund includes short exposure to global equities as a partial equity market hedge, currently in the form of the
ProShares Ultrashort MSCI EAFE
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At the time of publication, Dutram had no positions in equities mentioned.