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.