Investors may assume their exchange traded funds (ETFs) are isolated from Portugal’s debt problems, and downgrade. After all, there isn’t a Portugal-specific ETF available. But what’s happening in the country, just might affect other investments.

S&P recently downgraded Portuguese sovereign debt to BBB (two ratings away from “junk”); Fitch followed  with a downgrade to A-, reports Matt Hougan for The Street. Interestingly, there are reasons to think about one’s exposure to Portugal, as it may not be so obvious.

As of now, the fallout in the bond space has been immediate. Yields on Portuguese 10-year bonds pushed past 7.8%, while five-year bond yields jumped to 8.3%. The sovereign debt is huge, and Portugal’s insistence that no bailout is necessary and focusing on the fact that $13 billion worth of bond redemptions are due in April and June have sent the euro plummeting, explains Hougan. [Europe ETFs: Portugal Rejects Austerity Measures.]

The moral? Take into consideration any holdings that are affected by the value of the euro. This would include any European country funds, as well as any funds that play the currency. Hougan says, basically every 1% drop in the euro relative to the U.S. dollar translates into a 1% decline in euro-denominated funds.

The impact on the equity markets due to the fallout on the euro is enough cause for concern.

Meanwhile, Portugal is scrambling to raise taxes, and put into effect major spending cuts, to bring down financing costs and lesson the debt. Joao Lima for Bloomberg reports Portuguese President Anibal Cavaco Silva is setting dates to early elections in hopes of ending this political regime.

Some ETFs to keep an eye on while the events unfold in Portugal:

  • iShares S&P Europe 350 Index Fund (NYSEArca: IEV)
  • Vanguard European ETF (NYSEArca: VGK)
  • CurrencyShares Euro Trust (NYSEArca: FXE)
  • iShares MSCI Europe Financial Sector Index Fund (NYSEArca: EUFN)

Read the disclaimer; Tom Lydon is a board member of Rydex|SGI.

Tisha Guerrero contributed to this article.

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.