The iShares MSCI Spain Capped ETF (NYSEArca: EWP) is bouncing back today after tumbling nearly 4% on Tuesday, a performance that made the largest Spain exchange traded fund one of the day’s worst-preforming ETFs.
Political instability in the Eurozone’s fourth-largest economy could further elevate volatility for Spanish stock, potentially punishing investors that have poured into EWP this month. All eyes will be on Greece’s Syriza government in the coming weeks as it manages to settle outstanding debt with creditors. The government will have to scrape together enough cash to pay off a June 5 debt deadline to the International Monetary Fund, but many fear Greece will default on the loan.
Bond watchers were concerned that other peripheral states with growing anti-austerity political parties could push for more favorable debt relief. If creditors give Greece a pass and issues a big write down of Greek debt, there will be greater pressure to extend terms to other member states, which would quickly become economically unviable. [Contagion Fears hit PIIGS ETFs]
“Concern that Spain will follow Greece’s political path is back after Prime Minister Mariano Rajoy’s People’s Party suffered its worst result in a municipal balloting in 24 years. The outcome could presage bigger changes as a general election is due later this year, threatening the economic recovery that Rajoy managed to pull through with four years of austerity,” reports Sofia Horta E Costa for Bloomberg.
Investors have poured $71.4 million into EWP this month and over $302 million into the ETF this quarter, but over the past month the fund has tumbled 2.7%. That loss is roughly 200 basis points worse than that of the SPDR EURO STOXX 50 (NYSEArca: FEZ) over the same period.
The SPDR MSCI Spain Quality Mix ETF (NYSEArca: QESP) has been slightly better, falling 2.4% over the past month. QESP’s quality factor “captures excess returns to stocks that are characterized by low debt, stable earnings growth and other ‘quality’ metrics,” according to MSCI. [Don’t Ignore Spain ETFs]
Another issue to consider with EWP is the ETF’s top-heavy nature. Just three stocks – Banco Santander (NYSE: SAN), Telefonica (NYSE: TEF) and Banco Bilbao Vizcaya Argentina (NYSE: BBVA) – combine for 44.5% of the fund’s weight. Those stocks are down an average of 2.9% over the past month. [Top-Heavy ETFs]
Spanish stocks are also pricey. “The IBEX 35 trades at 16.4 times the estimated earnings of its members, compared with 15.6 for the Euro Stoxx 50,” according to Bloomberg. Said another way, Spanish stocks trade at roughly the same P/E as their less volatile U.K. counterparts.
iShares MSCI Spain Capped ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.