How Greece Is Affecting Your Portfolio

June 20, 2011

Greece is a mess, and it may be impacting your portfolio in unexpected ways.

Alan Greenspan noted that the chances of Greece defaulting are “so high that you almost have to say there’s no way out,” according to the New York Times. Also, credit default swaps on Greek debt have risen to 20 percent of the notional principal, despite the ECB’s fight to avoid a default.

As a consequence, it’s pretty clear that owners of debt funds and equity funds alike are vulnerable to big sell-offs should Europe’s leaders not pull together a 12 billion euro ($17 billion) rescue package to help prevent an imminent default.

If you’re holding a fund like the iShares S&P/Citigroup International Treasury Bond ETF (NYSEArca: IGOV) or the iShares S&P/Citigroup 1-3 Year International Treasury Bond ETF (NYSEArca: ISHG), you probably already know you’re on thin ice, as Greek government bonds make up over 4.5 percent of each ETF.

As of Thursday, both IGOV and ISHG are about flat over the past three months, compared with total return of 1.5 percent for the SPDR Barclays Capital Short Term International Treasury Bond ETF (NYSEArca: BWZ), which doesn’t hold any Greek bonds.

As for equity investors, they shouldn’t be hoodwinked into thinking minimal direct exposure to Greek companies will protect their returns in the event there’s a turn for the worse in Greece.

It is true that equity ETFs focused on Europe have minimal Greek holdings. For example, the iShares S&P Europe 350 (NYSEArca: IEV) and the iShares MSCI EMU (NYSEArca: EZU) have 0.28 percent 0.78 percent in Greece, respectively. The Vanguard MSCI European ETF (NYSEArca: VGK) only has 0.3 percent.

But, as I said, such small exposures to Greece don’t keep owners of these ETFs out of the woods. They may not own very many Greek companies, but chances are they hold companies that are exposed to Greece, particularly financial companies.

French banks appear to be most vulnerable. On June 15, Moody’s put three of the largest French banks on downgrade review because of their exposure to Greek bonds. While Moody’s only targeted France, banks throughout the developed world are exposed to Greek debt.

Financials make up 22.1 percent of IEV’s assets, 22.7 percent of EZU’s and 21.3 percent of VGK’s. IEV has lost more than 4 percent in the past month and EZU is down 2.8 percent.

If you’ve invested in one of the large-cap Europe ETFs, such as the SPDR Euro STOXX 50 ETF (NYSEArca: FEZ), you’re even more exposed. FEZ invests 28.4 percent of its assets in financials. The ETF has fallen almost 5 percent in the past month.

Not surprisingly, assessing investor vulnerability to Greece’s problems in terms of exposure to financials for the most part looks much the same through the lens of single-country equity ETFs.

The iShares MSCI France ETF (NYSEArca: EWQ) is 18.1 percent financials, the iShares MSCI Germany ETF (NYSEArca: EWG) has 17.5 percent and the iShares MSCI Switzerland ETF (NYSEArca: EWL) is 22.8 percent financials.

Unsurprisingly, EWQ, the French ETF, is the worst-performing of the three ETFs in the past month, with a loss of 3.6 percent.

Just as unsurprising is EWG’s relative outperformance: It has declined 1.4 percent in the past month—the latest sign that Germany has weathered the global financial crisis better than just about any other developed country.

In the end, all sorts of ETFs—those focused on fixed income, on broad equity benchmarks in Europe or the single-country funds—all stand to decline even more in the event of bank downgrades or, worse, a Greek default.

The takeaway is this: Look at your portfolio, and make sure you know what you own.

The table below shows the countries with the greatest exposure to Greece:

Country

% of Total

France

24.9

Switzerland

21.1

Germany

14.3

U.S.

5.4

Britain

4.1

Other

30.2

 

Source: The Economist, http://www.economist.com/node/15908288


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