The iShares MSCI Italy Capped ETF (NYSEArca: EWI) posted a modest decline last week, arguably an encouraging sign when considering the intensifying speculation surrounding Italy’s status as a member of the Eurozone.

Italy’s fragile position in the Eurozone comes as the region’s third-largest economy grapples with a still struggling banking sector and slack economic growth, among other potential headwinds. Italian banks make up a hefty component of EWI’s underling positions, with the financial sector accounting for over 30% of the ETF’s portfolio and top holdings including Intesa Sanpaolo and Assicurazioni Generali.

Political uncertainty continues to linger in Italy as well. Former Prime Minister Matteo Renzi resigned in December following a no-confidence referendum. At the time, some market observers believed 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.

“Italy’s president, Sergio Mattarella, appointed Paolo Gentiloni as the new prime minister after Renzi resigned,” according Mish’s Global Economic Trend Analysis. “The president said he would not hold new elections until differences between how the lower house of parliament assigned seats.”

Italy is not the first Eurozone nation to be on the brink of departing the monetary union. In recent years, Greece and Portugal flirted with leaving the Eurozone, though ultimately remained. However, speculation about the status of those countries in previous years also stoked chatter that Italy would eventually face a similar fate.

The European Central Bank (ECB) and the Bank of Italy have each said the cost of Italy leaving the Eurozone would be significant.

“ECB governing council member Ewald Nowotny and Bank of Italy deputy governor Salvatore Rossi made their comments after calls from the anti-establishment 5-Star Movement, running just behind the ruling Democratic Party in opinion polls, to dump the euro. Elections could be held as early as June and, with several parties pushing for Italy to quit the single currency, the subject is likely to feature strongly,” reports Reuters.

Alternatives to EWI include the the iShares Currency Hedged MSCI Italy ETF (NYSEArca: HEWI) and Deutsche X-trackers MSCI Italy Hedged Equity ETF (NYSEArca: DBIT), both of which are currency hedged ETFs.

For more information on Italy, visit our Italy category.

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