The Eurozone just played a trick, reporting 0.3% year-over-year GDP growth in the second quarter, beating expectations of a slowdown.
ETF investors, however, would be wise to take a closer look. This isn’t a rising-tide-lifts-all-boats affair. In reality, a small subset of ETFs is enjoying the real returns, courtesy of a sharp under-the-hood divergence.
Here’s what the market’s actually telling us, and the ETFs best poised to gain from it.
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Spain And France Are The New Growth Drivers — Not Germany
Let’s cut to the chase: Germany, the economic giant of the Eurozone, stalled in Q2. Italy? In contraction.
But Spain’s 0.7% expansion and France’s 0.3% kick, according to Eurostat, suggest a new regional dynamic fueled by domestic consumption, services, and tourism, rather than exports or industrial clout.
This makes country-specific ETFs an astute tactical move:
- iShares MSCI Spain ETF (NYSE:EWP) – has high exposure to financials, consumer services, and infrastructure.
- iShares MSCI France ETF (NYSE:EWQ) – bets on luxury, utilities, and local cyclicals.
These economies are not only growing, they’re decoupling from Germany’s industrial malaise.
Sector Stars: Financials And Utilities Are Quietly Climbing
With low interest rates and a strong euro, European banks are proving resilient. Throw in growing domestic consumption and infrastructure planning, and the utilities sector also enters the scene. Two plays to track:
SPDR EURO STOXX 50 ETF (NYSE:FEZ) – holds financial titans such as BNP Paribas and Banco Santander. The fund is up almost 10% in the last six months.
This ETF is reaping the rewards of a less export-sensitive climate, which is ideal in an environment where euro appreciation is stealthily eroding trade competitiveness.
The FX Factor: Currency-Hedged ETF Flexing
And talking of the euro, its recent appreciation is a double-edged sword. Wonderful for Eurozone tourists, but a hindrance on USD-denominated returns for U.S. investors in unhedged ETFs.
iShares Currency Hedged MSCI EMU ETF (NYSE:HEZU) is one of the hedged heroes that have outperformed unhedged rivals year-to-date, demonstrating that in a world sensitive to FX, hedging is no longer a choice, but rather a source of alpha.
Germany’s $1 Trillion Stimulus Plan — Opportunity Or Mirage?
Germany’s proposed €1 trillion stimulus plan, which targets defense and green infrastructure, might turn the tide someday. For the contrarian and patient, a comeback play is coming.
Funds like Franklin FTSE Germany ETF (NYSE:FLGR) are now dragged down by industrial lethargy. But if Berlin unlocks the fiscal sluice gates, they may be among the first to benefit from a boom in capital spending.
What About The Broad ETFs?
Traditional Eurozone ETFs such as iShares MSCI Eurozone ETF (BATS:EZU) and Vanguard FTSE Europe ETF (NYSE:VGK) still provide decent diversification. But their significant weights in Germany, Netherlands, and multi-nation exporters render them less sensitive to the domestic-growth narrative unfolding in southern Europe.
This is not a textbook Eurozone recovery. It’s a low-key, patchy rebound spearheaded by secondary players and lower-profile sectors, and the ETF scene appears to be registering the same.
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