France and Europe-related exchange traded funds have been on the market’s radar ahead of a closely watched election cycle, and may potentially offer an opportunity for investors ahead.
The iShares MSCI France ETF (NYSEArca: EWQ), the largest France exchange traded fund trading in the U.S., is up 7.1% year-to-date and has gained 1.2% over the past week.
French equities have remained relatively subdued in sideways action as the country heads toward its national election, which could decide the ultimately decide whether or not the country parts ways from the European Union or maintains the status quo.
On Sunday, April 23, French citizens will head to the ballots and pick their next president. The process involves a two round presidential election vote, with the first round taking place on Sunday with 11 different candidates. If no one makes out with an outright majority, which is likely the case, the top two popular picks will proceed to a runoff on May 7.
The front runners include Francois Fillon, a conservative center-right Republican; Benoit Hammon, a mainstream left-wing socialist; Marine Le Pen, the leader of the far-right National Front; Emmanuel Macron, an independent centrist; and Jean-Luc Melechon, the hard-left creator of the French Unbowed Movement.
The polls, though, project Macron and Le Pen to go head-to-head in the runoff. From the latest polling results, Macron, the center-right pro-EU candidate, leads with 23%, followed by Marine Le Pen, who has vowed to freeze immigration and end the Schengen agreement, at 22%, Fillon at 20% and Melechon 19%.
If Le Pen wins, the potential for a “Frexit” or French exit from the EU is a likelihood as she has vowed to renegotiate France’s place in the European bloc and voiced support for departing from the euro currency. However, even if Le Pen becomes president, she may find it hard to secure a majority in parliament, which further lowers the near-term risk of a Eurozone dissolution.
Given the disparate stances among the candidates, the markets anticipate heightened volatility after the first round. Nevertheless, some see a potential for opportunity if extreme volatile moves follow the eventual winner.
For example, the most obvious play would be to look at the iShares MSCI France ETF (EWQ). EWQ allocates over 37% of its combined weight to industrial and consumer discretionary stocks while financials and healthcare names combine for over a quarter of the ETF’s weight. Markets likely want Le Pen to be defeated and that appears to be likely outcome in France, which could further support EWQ.
For a broader play, something like the iShares MSCI EMU ETF (NYSEArca: EZU), which tracks the MSCI European Monetary Union Index, provides a targeted play to Eurozone markets. France is its largest country component at 32.3% over the underlying portfolio, followed by Germany 29.7% and Netherlands 11.0%.
Investors worried that lingering uncertainty could further weigh on the euro currency can also consider the currency-hedged WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ), which includes a 24.7% tilt toward France. The currency-hedged ETF may outperform non-hedged Europe funds if the euro currency depreciates.
On the other hand, traders may look to something like the Direxion Daily European Financials Bear 1X Shares (NYSEArca: EUFS), and the ProShares UltraShort FTSE Europe (NYSEArca: EPV), which tracks the -2x or -200% daily performance of the FTSE Developed Europe Index, to hedge against further pullbacks in Eurozone equities.
Additionally, aggressive currency traders can also target further weakness in the Eurozone through inverse ETF options. For instance, the ProShares Short Euro (NYSEArca: EUFX) is designed to provide 100% of the inverse, or opposite, return of the U.S. dollar price of the euro, on a daily basis and the ProShares UltraShort Euro (NYSEArca: EUO) provides 200% of the inverse return of the U.S. dollar price of the euro on a daily basis. The Market Vectors Double Short Euro ETN (NYSEArca: DRR) tracks the Double Short Euro Index, which also provides a -200% exposure to the euro.
Full disclosure: Tom Lydon’s clients own shares of HEDJ.