Economic conditions in Europe can be mildly classified as troubling. There’s the loss of key bankers at the European Central Bank, the Greek debt crisis, and deteriorating conditions in Portugal, Italy, Ireland and Spain — a group that, including Greece, investment professionals refer to as PIIGS. And as the Wall Street saying goes, “When you put lipstick on a pig, it’s still a pig.”
However, the contrarian will view volatility as a friend and seek buying opportunities during the time when the general public is selling. ProShares Ultra Short Euro (NYSE:EUO) ETF is a pure currency play that takes bearish bets on the drop of the euro to the U.S. dollar. This strategy uses leverage that will magnify gains and losses significantly. See the chart below:
The price action of this program clearly shows how volatile the share values are. Recent price behavior might be an indicator of a change in trend.
An ETF that may offer a more conservative approach than EUO is the Wisdom Tree Europe SmallCap Dividend Fund (NYSE:DFE). This ETF seeks returns from share price performance and dividend income from its holdings. The ETF is benchmarked to the WisdomTree Europe SmallCap Dividend Index. This index was created in May of 2006 and has a five-year track record. The sector breakdown is:
- Consumer Discretionary: 19.74%
- Industrials: 17.74%
- Financials: 17.02%
- Information Technology: 8.44%
- Materials: 6.74%
- Consumer Staples: 6.7%
- Health Care: 3.82%
- Utilities: 1.87%
- Telecommunication Services: 1.01%
- Energy: 0.98%
- Other: 0.55%
The above chart indicates that only 84.06% is allocated to the various industries. Based on this, it is perceived that the remaining 15.94% is held in cash. This indicates the management of EUO is bearish on Europe as a whole.
The iShares S&P European 350 Index (NYSE:IEV) ETF is based on the same index that covers 350 European stocks in more than 10 market sectors, and it seeks price and dividend yields as the profit. This ETF was brought to the market in 2000. The breakdown of exposure to countries is:
- United Kingdom: 35.8%
- France: 14.55%
- Switzerland: 13.28%
- Germany: 11.41%
- Spain: 5.05%
- Sweden: 4.42%
- Netherlands: 3.86%
- Italy: 3.7%
- Belgium: 1.51%
- Denmark: 1.38%
The United Kingdom is not part of the European Central Bank, and this greater distance between the U.K. and European economies might give this ETF greater downside protection from what is taking place on the mainland.
Jeffrey L. Stouffer is the principal of Mercantile Capital Group, a Herndon, Va.-based introducing broker registered with the CFTC and a member of the National Futures Association. He can be reached at mercapitalgroup@aol.com. He has no direct or indirect holdings in any of the aforementioned ETFs.
