The iShares MSCI Italy Capped ETF (NYSEArca: EWI) is up almost 11% year-to-date, placing the lone Italy ETF in the middle of the five single-country PIIGS exchange traded funds in terms of 2015 performance.
Even with EWI’s solid year-to-date showing, the $963 million ETF could deliver more upside, particularly if the euro stabilizes.
“The key drivers for the Italian FTSE MIB are construction spending, the Euro dollar relationship, exports, Business lending to consumers over 5 years, industrial production from manufacturing, and Business confidence,” said Strategic International Securities (SIS), a New York-based registered investment advisor, in a note on EWI out Tuesday.
SIS initiated coverage of EWI with an overweight rating and an $18 price target, nearly 20% above where the ETF closed yesterday. The ETF’s medium-term fortunes will be driven by the financial services sector, and perhaps surprisingly to some investors, oil prices.
Reforms to Italy’s fractured banking system could be a catalyst to drive EWI higher. The changes could fuel debate over industry consolidation to target greater returns and economies of scale encouraging mergers and acquisitions, according to Mediobanca Securities. Specifically, the reforms would turn these types of banks into possible takeover targets almost instantly. For instance, the new rules could be a catalyst for a potential merger between UBI Banca and Banca Monte dei Paschi di Siena. [Catalysts for the Italy ETF]
The financial services sector is EWI’s sector weight at 38.6%. Energy is next at 16.5%, the bulk of which is occupied by Eni (NYSE: E). Italy’s energy giant is EWI’s largest holding at a weight of 12.4%. Shares of Eni are up 13.8% in the past month, helping lift EWI to a 4.6% gain over that time. [Value With PIIGS ETFs]
“If the euro continues to weaken the EWI will underperform the FTSE MIB up 21.8% in Q1 2015 because of the strong dollar. This is in contrast to the 8.8% increase in EWI for Q1 2015, which highlights the importance of hedging the currency with these ETFs,” according to SIS.
Currently, there is not a dedicated euro hedged Italy available to U.S. investors. However, Deutsche Asset & Wealth Management filed plans for the Deutsche X-trackers MSCI Italy Hedged Equity Fund last year while a recent filing indicated BlackRock could launch the iShares Currency Hedged MSCI Italy ETF, the currency hedged answer to EWI.
iShares MSCI Italy Capped ETF