Is Europe Swinging To The Right? ETFs In Focus

Austria went to polls on Oct 15 to choose its next leader. After a decisive victory for Sebastian Kurz, nationalist politics seems to be coming in the picture again.

With the counting almost completed, excluding those who voted out of their home districts, People's Party took away 31.6% of the votes. Social Democrats secured the second place with 26.9% votes, while far-right Freedom managed 26%.

Fate of the Far-Right

Far right politics seems to be gaining steam in Europe. Despite Geert Wilders of Netherlands and Marine Le Pen of France failing to emerge victorious in their respective elections, the support they received shows that Europeans are divided when it comes to political orientation in their respective countries.

Moreover, last month in Germany, anti-immigration Alternative for Germany (AfD) secured 12.6% votes as Germans opposed Merkel’s friendly refugee policy and her handling of the 2015 migrant crisis (read: How to Ride 33-Month High Euro With ETFs).

However, the stark difference between these countries is that, in Austria, the far-right is expected to be part of the government. It is widely expected that Kurz, in order to gain majority to form a parliament, will form a coalition with the far-right Freedom party.

The greater relative support for AfD and the Freedom party shows that far-right populism is still a concern for Europeans as they are worried about losing jobs to immigrants and the apparent threats to national security from the so-called Islamophobia.

Incumbent Christian Kern said, "We've seen a move to the right in this election. It's not a time that favors social democrats. We've seen that in all of Europe."

What’s in Store for Europe?

“I'll fight with all my strength for change in this country”, Kurz said. With a campaign focused on stronger border controls, reduced caps on refugees and harsher stance on immigration in general, current foreign minister Kurz is set to become Europe’s youngest leader (read: 6 Europe ETFs Are Top Picks).

Kurz’s pro-EU stance makes markets believe that an exit from the EU is not in the cards. However, if the Freedom party does indeed end up being part of the government, its harsh stance toward the European Union (EU) will make it difficult for Germany’s Merkel to work alongside France’s Emmanuel Macron to secure further integration in the euro region.

Let us now discuss a few ETFs focused on providing exposure to Austrian equities (see all European equity ETFs here).

iShares MSCI Austria Capped ETF EWO

This fund seeks to provide exposure to a broad range of equities in Austria.

The fund manages AUM of $266 million and charges 48 basis points in fees per year. Financials, Materials and Energy are the top three sectors of the fund, with 30.4%, 20.1% and 16.2% allocation, respectively (as of Oct 13, 2017). From an individual holdings perspective, the fund has high exposure to Erste Group Bank AG, OMV AG and Voestalpine AG, with 21.0%, 14.2% and 9.6% allocation, respectively (as of Oct 13, 2017). It has returned 44.6% year to date and 48.8% in a year (as of Oct 13, 2017). EWO currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Let us now compare the performance of this ETF to a broader Europe based ETF, FEP.

First Trust Europe AlphaDEX Fund FEP

This fund seeks to provide exposure to equities in the European region.

The fund manages AUM of $620.2 million and charges 80 basis points in fees per year. From a geographical perspective, the fund has high allocation to United Kingdom, Germany and France, with 21.6%, 14.8% and 13.3 exposure, respectively (as of Oct 13, 2017). Industrials, Consumer Discretionary and Materials are the top three sectors of the fund, with 19.3%, 15.9% and 15.9% allocation, respectively (as of Oct 13, 2017). From an individual holdings perspective, the fund has high exposure to ArcelorMittal, Anglo American (LON:AAL) Plc and Glencore (LON:GLEN) Plc, with 0.9%, 0.9% and 0.9% allocation, respectively (as of Oct 13, 2017). It has returned 28.4% year to date and 28.4% in a year (as of Oct 13, 2017). FEP currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

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