Most ETF investors haven’t given much thought to how France might impact their portfolios—until this year, that is.
On Sunday the country will go to the polls for round one of an election to pick two of four leading candidates for a runoff the following weekend, and the stakes couldn’t be higher.
Should France Stay In The EU, Or Go
The four represent a wide political spectrum, from ultra-conservative and anti-immigration candidate Marine Le Pen, who is one point behind in the most recent polls, to current frontrunner Emmanuel Macron, who’s the middle-of-the-road candidate and newcomer.
Le Pen wants to extract the country from the European Union, while Macron would maintain the status quo.
Behind the two are Francois Fillon, the only candidate from the scandal-plagued political establishment, who served as prime minister to President Nicolas Sarkozy . He would also maintain EU status quo.
The real wild card is the communist-backed Jean-Luc Melenchon, who has proposed a 100% tax on income over $400,000, and like Le Pen, opposes globalization and the EU.
Volatility In The Making
While Le Pen and Macron are leading, it’s not by much over the other two. With such diverse views of where France should go—out of the EU or stay the course—a new potential macro flashpoint could be in the making.
The unpredictability has French and European investors on pins and needles and investors around the world bracing for volatility if the winner pledges to lead the country out of the EU, following the United Kingdom’s Brexit vote.
Of course, some investors see potential opportunity, if extreme market moves follow the eventual winner.
Slim French Pickings
But for U.S. ETF investors, the pick is slim. There is only one U.S.-listed France ETF, iShares MSCI France ETF (EWQ), the $404 million fund launched more than 20 years ago. EWQ has performed on par with the largest European fund, gaining 7.34%, to the $11.4 billion Vanguard FTSE Europe ETF’s (VGK) 8.09% increase. Both funds have outperformed the SPDR S&P 500 ETF Trust (SPY), which has returned 5.83%.
To Hedge Or Not To Hedge
But beyond the straightforward ETF plays, the question of what the election may do to the euro, and what that means to the U.S. dollar, may be a bigger worry for U.S. investors. However, the third-largest European ETF, the $9 billion WisdomTree Europe Hedged Equity Fund (HEDJ), offers U.S investors a way to remove euro currency exposure.
If the status quo is the future, the euro could jump against the dollar, the opposite of what it did after the Brexit vote, when it tumbled hard, as did the U.K.’s sterling.
HEDJ tracks an index of Eurozone dividend-paying companies that derive a majority of revenue from exports outside the Eurozone; it also hedges the euro against the dollar.
With the dollar slumping against the euro, HEDJ performed better this year than EWQ, VGK and SPY with a 9.11% gain.
Investors Not Saying Au Revoir
Despite the uncertainty and potential “Brexit” market fallout, investors have not only stuck around, but have added $88 million in assets to EWQ this year, $31 million of that in April alone.
Surely Sunday’s run-off results could change both flows and performance of EWQ and other EU-related funds, as could the following week’s election.
But there are many ways to play the uncertainty and market moves that may accompany it, from expecting French and European markets go up or down, to working the euro angle, to that old standby—staying on the sidelines.
Drew Voros can be reached at [email protected].