What Lies Ahead For Germany ETFs?

Germany’s inflation hit its highest level in five years in 2017. Germany is the biggest country in the 19-nation Eurozone bloc. Its economic condition is seen as a representative of Eurozone’s economic scenario.

European Central Bank (ECB) has been injecting money into the system to artificially increase inflation in order to meet its 2% target. However, owing to strong economic recovery and a positive global trade outlook, ECB announced in October 2016 that its quantitative easing programme will be reduced from a rate of 60 billion euros a month to 30 billion euros from January 2018 for an initial nine-month period.

Economic Data

Consumer prices in Germany increased 1.7% year over year in December compared with 1.8% in November, per federal statistics authority Destatis. However, it came in above analysts’ expectations of 1.5%. “This is the correction to the inflation course desired by the ECB,” said Alexander Krueger of Bankhaus Lampe to Reuters. “And it is sustainable.”

Germany’s GDP increased 2.8% year over year in the third quarter of 2017 compared with 2.3% in the prior quarter. Moreover, the German government now expects GDP growth to hit 2% and 1.9% in 2017 and 2018, respectively.

Coming to joblessness, unemployment rate in December was 5.5%, same as the revised reading for November and the lowest since German reunification in 1990. This indicates that the German economy is on a strong growth track and is supportive of a positive outlook for the economy.

Risks Involved

Currency Risk

The German economy faces risks from a rising euro, as it will hurt export demand. The euro is up almost 14.2% against the dollar in a year. Moreover, ECB’s unwinding of its stimulus plans from 60 billion euros to 30 billion euros a month provided support to the euro (read: After a Stellar 2017, Will Euro ETFs Beat Greenback in 2018?).

Political Risk

Germany has become prey to a lot of political uncertainty. In the German elections, Merkel secured her fourth term as the country’s chancellor but her party, the Christian Democratic Union (CDU), witnessed its worst results since 1949. From the 2013 election, CDU’s share declined 8.5 points to 33%.

Merkel’s plans to form a coalition with the Greens and pro-business Free Democrats (FDP) failed. Now the four-time chancellor is eyeing a coalition with the Social Democrats (SPD). "Confidence has grown and we are optimistic heading into the talks,” per a statement issued following a meeting between the two parties.

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

iShares MSCI Germany ETF EWG

This fund is an appropriate bet for those looking to gain exposure to large-cap companies in Germany.

EWG has AUM of $4.7 billion and charges 49 basis points in fees per year. Consumer Discretionary, Financials and Materials are the top three sectors of this fund, with 18.6%, 15.0% and 14.7% allocation, respectively (as of Jan 3, 2017). The top three holdings are SAP, Siemens AG (DE:SIEGn) and Allianz (DE:ALVG) with 7.4%, 7.2% and 7.0% exposure, respectively (as of Jan 3, 2017). EWG has returned 30.3% in a year. As such, EWG has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

First Trust Germany AlphaDEX Fund FGM

This fund seeks to provide exposure to German equities across market caps.

FGM has AUM of $262.9 million and charges 80 basis points in fees per year. Industrials, Consumer Discretionary and Real Estate are the top three sectors of this fund, with 25.0%, 22.3% and 16.3% allocation, respectively (as of Jan 3, 2017). From an individual holdings perspective, Deutsche Lufthansa (DE:LHAG) AG, Wirecard AG and Rheinmetall AG are the top three holdings of the fund, with 5.5%, 4.9% and 4.7% allocation, respectively (as of Jan 3, 2017). It has returned 47.8% in a year. As such, FGM has a Zacks ETF Rank #1 with a Medium risk outlook.

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