At long last, there’s a deal in place to help contain the debt crisis in Europe and keep the euro currency in action. Exchange traded funds (ETFs) are soaring on the news in keeping with the adage that the most beaten-down areas perform the best in recoveries.
Looking at the leaderboard this morning, European-focused ETFs are charging ahead this morning led by two countries that many feared were next in line for trouble: Spain and Italy. iShares MSCI Spain (NYSEArca: EWP) and iShares MSCI Italy (NYSEArca: EWI) are up by more than 10% so far today.
It’s no surprise. The European Union’s jaw-dropping $1 trillion rescue deal should lay to rest concerns about continuing issues in Europe, particularly in the troubled PIIGS group of countries. The PIIGS are Portugal, Italy, Ireland, Greece and Spain. The deal was reached early today. [U.S. Dollar Has Moment In the Sun.]
In a move called the “nuclear option,” the European Central Bank is going to buy both government and private debt to grease those markets and keep borrowing costs low, says the Associated Press.
The markets heartily approve of the move. Following the agreement, stock market futures soared to their daily limit and upon opening, the Dow Jones Industrial Average rocketed more than 350 points.
Aside from the Italy and Spain ETFs, the rest of the top-performing funds today are nearly all Europe-focused ETFs. This might be the beginning of a beautiful friendship, but bear in mind that several of these ETFs are well below their long-term trend lines. Italy and Spain are both more than 20% below the mark. [Tom Lydon Says Why He’s Bullish.]
Various ETFs reacted differently to the crisis. Most of the fear was, as we said above, centered on the PIIGS. But many funds were dragged down as the fear of a contagion effect took hold. iShares MSCI Sweden (NYSEArca: EWD), iShares MSCI Switzerland (NYSEArca: EWL) and iShares MSCI United Kingdom (NYSEArca: EWU) are the least off their long-term trend lines, down 8.5% at the most. [Positives and Negatives in France ETF.]
If you’re fearful or skeptical of this deal and the impact it may have and don’t want to take on single-country risk, a broader Europe ETF might be a better option for you. SPDR Dow Jones Euro STOXX 50 (NYSEArca: FEZ) and iShares MSCI EMU Index Fund (NYSEArca: EZU) are two such choices that give more diversity. [The Case for Buying the Euro.]
And lastly, one area that really got beaten up in this move is the euro. CurrencyShares Euro Trust (NYSEArca: FXE) and WisdomTree Dreyfus Euro (NYSEArca: EU) are two ways to play any recovery witnessed in the weakened currency. On the flip side is a bearish dollar play with PowerShares DB U.S. Dollar Bearish (NYSEArca: UDN).
Whether today’s move has staying power remains to be seen, so keep your strategy firmly in place and wait for that trend line crossover before acting if you want exposure to the European economy.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.