Call it a comeback. After spending much of the first half of 2016 as one of the worst-performing non-leveraged sector exchange traded funds, the iShares MSCI Europe Financials ETF (NYSEArca: EUFN) surged 7% last week, trimming its year-to-date loss to less than 5%.
Previously, market observers warned that the ongoing monetary polices and depressed rates would weigh on banks’ bottom line as firms would find it hard to make money with a flat yield curve – banks borrow short-term and lend long-term.
Negative interest rates in the Eurozone and in other European countries are another problem for EUFN’s holdings.
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EUFN’s resilience is arguably surprising given the ETF’s exposure to Italy. The Italian referendum, which is supported by Prime Minister Matteo Renzi, was voted down over the weekend. Renzi initially pledged to resign if the results don’t go his way, potentially leading to a caretaker government that could focus on reforming Italy’s electoral law.
Renzi’s resignation could lead to early elections and a rise in support for the populist anti-euro Five Star Movement. The party would seek to carry out a referendum on Italy breaking away from the Euro area.
Recent Eurozone political volatility is not keeping investors away from EUFN.
“Inflows into the iShares MSCI European Financials ETF (EUFN) surpassed $137 million on the day, more than doubling its previous all-time high. Thursday’s inflows were the sixth highest among U.S.-listed equity ETFs, boosting EUFN’s assets by 35 percent,” reports Luke Kawa for Bloomberg.
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Investors can play a possible pullback in in EUFN and European banking names with the new Direxion Daily European Financials Bear 1X Shares (NYSEArca: EUFS), which debuted in August. EUFS is an inverse though not leveraged ETF.
“One measure of the German yield curve steepened by the most in eight years as the ECB removed its deposit floor for sovereign bond purchases and indicated it would lower its monthly asset purchases by 25 percent, to 60 billion euros per month starting in April. For companies in the business of maturity transformation, a widening spread between short and longer-term interest rates is a boon to profitability,” according to Bloomberg.
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