ETF Of The Week: iShares MSCI Italy ETF

Welcome to ETF Of The Week, a designation given to the most newsworthy or notable fund of the past seven days.

Are we in for Brexit 2.0? That's the concern now that Italy's two largest political parties, the anti-establishment 5-Star Movement and the far-right League, have finally reached an agreement to form a functional, coalition government.  

Late Thursday, the two populist parties announced their agreement to establish a functional government, as Italian President Sergio Mattarella approved the appointment of law professor and euro skeptic Giuseppe Conte as prime minister.

This came on the heels of Mattarella's veto of Conte's choice of finance minister, noted anti-EU economist Paolo Savona, on Sunday, which put a halt to the two parties' attempt to form a government.

Rudderless Government

For context, Italy hasn't had a government since its last round of elections in March.

For the moment, the political drama appears to be over. Yet analysts fear bigger turmoil may be on the horizon, should the new government introduce a Brexit-like referendum on whether Italy should leave the European Union.

Italy is the third-largest economy left in the EU, and the eighth-largest in the world, so even the possibility of an "Italexit" could have momentous consequences worldwide.

Market Shockwaves

The political uncertainty over the past week has reverberated in the Italian bond market, where short-term yields spiked and 10-year yields skyrocketed to their highest levels in more than three years.

It also sent nasty shockwaves through the $485 million iShares MSCI Italy ETF (EWI), which tracks the top 85% Italian companies by market cap. EWI dropped about 7% on Monday after the veto, though the fund has since recovered some of those losses:

Source: StockCharts.com. Data as of May 31, 2018.

EWI isn't the only Italian equity ETF: The iShares Currency Hedged MSCI Italy ETF (HEWI) offers a currency-hedged take, while the Franklin FTSE Italy ETF (FLIY) has similar exposure to EWI, but its expense ratio is 0.09% versus EWI’s 0.49%

Size & Liquidity Matter

But neither HEWI nor FLIY come anywhere close to the size or the liquidity of EWI, which trades $47 million in average volume daily, boasts a mere 0.03% spread and has nearly $500 million in assets under management.

Nor can they beat EWI's multidecade track record: EWI is one of the oldest ETFs around, launched in 1996 by iShares alongside a wave of other single-country funds.

With only 23 names in its portfolio, EWI is highly concentrated in mostly large-caps. It's also top-heavy: The top 10 countries make up more than two-thirds of EWI's portfolio, while Italian banks alone make up 31% of its holdings.

EWI's top two holdings, however, are oil producer Eni and electricity utility Enel, each with 11% of the portfolio. 

Even before the veto, EWI had been seeing a rocky 2018, with the fund rising just 0.56% year-to-date. Since the start of May, the ETF has dropped roughly 10%. Though Italy now has a government, it's anybody's guess whether the drama is over, and whether even bumpier times for EWI may lie ahead.

Contact Lara Crigger at [email protected]