EWP Still Looks Iffy Amid Spanish Slog

July 10, 2012

Volatile EWP remains a liquid lightning rod for Spain's troubles.

The iShares MSCI Spain Index Fund (NYSEArca: EWP) is still down about two-thirds from its all-time high of December 2007 despite seemingly good news that Spain’s financial sector will get a bailout and the country will get extra time to fix its fiscal affairs.

A meeting on Monday at which European finance ministers agreed to give Spain one extra year to bring its budget deficit in line with the region’s rules did little to foster confidence in Spain’s economic prospects. Policymakers also promised 30 billion euros in rescue loans for Spanish banks this month.

After the news percolated through markets, yields on 10-year Spanish sovereign bonds were still hovering around the 7-percent-mark—a level considered unsustainable in the long run. Investors are clearly doubtful the latest policy measures would actually halt the debt crisis that has been unfolding for three years.

At the heart of that doubt is the murky nature of the deal’s details, such as the issue of who will ultimately be responsible for backing up these loans. That’s especially true if the eurozone fails to establish a unified banking union, according to a story in the Wall Street Journal.

EWP, the market’s only ETF focused on Europe’s fourth-largest economy and one of its most troubled, has fallen 6.7 percent in the last five days alone, and its closing price of $22.61 a share Tuesday was almost 67 percent lower than its peak in late 2007 and just above a recent low of $21.23 on June 1. The ETF was launched in March 1996.

“I would not own Spain right now,” David Garff, managing director of Accuvest Global Advisors, a Walnut Creek, Calif.-based firm that manages equity portfolios using only single-country ETFs, said in a telephone interview.

A Value Trap

Garff said Spain is literally at the bottom of the list of 29 countries his firm evaluates for use in its asset-allocation strategies on three crucial fronts.

To be clear, Spain is 29th in terms of fundamentals, momentum and risk, though it is No. 2 in terms of valuation.

“We look at Spain and think of it as a ‘value trap,’” Garff said, using a term in money management that refers to a security that looks attractive based strictly on valuations, but in reality is probably an investment headed nowhere fast.

Garff said Spain’s fiscal problems were likely to take years to straighten out, though he considers Spain’s place in the eurozone secure.

He reckons that while the cost of maintaining Spain’s membership in the eurozone is likely to be substantial, the cost of the country leaving the eurozone and again using pesetas would inflict far greater damage on the country and the global economy.

Garff noted, however, that his firm does have short positions in EWP via its own ETF strategy, the AdvisorShares Accuvest Global Long Short ETF (NYSEArca: AGLS).

The fund, which came to market a year ago, had $18.2 million in assets as of July 9, according to data compiled by IndexUniverse.

Launched In 1996

EWP, an ETF with more than $162 million in assets, has shed more than 24 percent of value year-to-date and has dropped nearly 43 percent in the past year.

EWP is heavily tilted toward financials—nearly 40 percent of the portfolio is tied to the financial sector—and Spain’s Banco Santander makes up as much as 20 percent of the portfolio.

iShares launched EWP in March 1996—a long time before many people even knew what an ETF was, and long before firms like Garff’s started making such single-country funds the centerpieces of their money management philosophies.

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