ETF Trends
ETF Trends

The iShares MSCI Spain Capped ETF (NYSEArca: EWP), the largest exchange traded fund tracking stocks in the Eurozone’s fourth-largest economy, has been steady to start 2017, no small feat as political volatility pressures some of the region’s larger economies. EWP is higher by about 2% since the start of the year.

In 2015, Spain and its financial markets dealt with the issue of Catalonian independence as Catalonia makes up almost one-fifth of Spain’s gross domestic product and one-quarter of exports. Today, the political outlook in Spain is arguably sanguine relative to France and Italy, the second- and third-largest Eurozone economies.

Investors can also consider the factor-based SPDR MSCI Spain Quality Mix ETF (NYSEArca: QESP) as an alternative to the cap-weighted EWP. The quality factor “captures excess returns to stocks that are characterized by low debt, stable earnings growth and other ‘quality’ metrics,” according to MSCI.

QESP is also heavily exposed to the financial services sector with a weight of 33.5% to that group. The factor-based Spain ETF also offers some leverage to the recovering Spanish consumer with over 10% of its weight going to consumer sectors.

“It’s no secret that Europe is much cheaper that the United States. Compared to the Eurozone, Spain (iShares MSCI Spain Capped ETF (NYSEARCA: EWP) has an even cheaper valuation,” according to a Seeking Alpha analysis of Spain and EWP. “We believe this undervaluation is undeserved and expect Spain to get a valuation more in line with the Eurozone. The Eurozone’s valuation itself also has room to grow!”

Spanish stock observers are keeping a close on eye on the situation as Catalonia makes up almost one-fifth of Spain’s gross domestic product and one-quarter of exports. Losing the region would put a significant dent in Spain’s ability to dig itself out of the prolonged slump.

The European economies is expected to enjoy earnings growth in the year ahead from cyclical sectors that benefit from improved global growth and a weakening euro currency. Europe will likely benefit from increased trade as the U.S. led bout of reflation helps bolster stronger growth outlooks globally.

“The combination of an economic tailwind, improving earnings forecasts, positive price momentum and cheap valuation are the perfect cocktail: BUY Spain,” according to Seeking Alpha.

For more information on European markets, visit our Europe category.

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.