Strengthening Spanish economy drives IBEX 35 ETF

Aug 18th, 2015 | By | Category: Equities

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Following the severe downturn of the 2008 financial crisis, Spain has managed to promote a gradual recovery in its economy, evidenced by recent improvements in key economic indicators. The country posted its strongest quarterly growth for eight years in Q2 2015, revising GDP expansion for the year to 3.3%, one of the strongest rates in the eurozone. Exchange-traded funds linked to the Spanish equity market are accordingly bouncing back after being depressed for some time. The db x-trackers IBEX 35 UCITS ETF (DXIBD), which tracks the IBEX 35 Index, has gained 7.9% year-to-date (as of 18 August).

Spanish ETFs continue bull run as economy posts best quarterly growth in eight years

Spanish ETFs have gained significant value in 2015 thus far as tough austerity reforms begin to benefit economy.

The catalyst for Spain’s woes in 2008 was a hugely inflated real estate bubble, coupled with major irregularities being performed by the nation’s banks. As the recession took hold, unemployment climbed above 25%.

Although government debt levels of 60% of GDP were modest going into the crisis, large expenditures to bail out a succession of failing banks coupled with soaring rates and troubled bond markets in general, rapidly put Spain’s sovereign debt position under pressure. The yields on 10-year government bonds in July 2012 was 7.5%, more than 5% above German bunds. The European Central Bank promptly intervened to prevent speculative runs on the country’s debt.

At this point, the government, led by Prime Minister Mariano Rajoy, implemented tough reforms that were widely unpopular. Public-sector wages and benefits were slashed and VAT was increased to 21%. Plans were also drawn up to gradually reduce the corporate tax rate to 25% as well as the top marginal income tax rate to 45%. Deductions were limited, the tax base was broadened and severe penalties for tax invasion were enforced.

Despite street demonstrations that turned violent on several occasions, most notably during the largest rally in Madrid in March 2014, as well as the rise of an anti-austerity left-wing opposition group, the government persisted with the reforms. Over time, due to these hard choices but also helped by falling energy prices, reduced systemic risk from peripheral eurozone nations, and a cheap euro which boosted exports, Spain has managed to improve its economic outlook greatly.

Luck has played a factor too. The Greek crisis may have actually been beneficial for Spain as travellers, concerned about taking stacks of cash to Greece, favoured Spain as a summer holiday destination this year.

There is still quite a hill to climb for the country despite the impressive quarterly growth. Structural unemployment may be as high as 18% and younger people find it particularly challenging to find work. Tax and labour market reforms need to develop further and the government must ensure continued fiscal discipline.

That said, disregarding the potential risk of a major economic event such as a ‘Grexit’ impacting Europe, Spanish equity ETFs appear offer attractive investment opportunities relative to the rest of the region.

The aforementioned db x-trackers IBEX 35 UCITS ETF trades on the Madrid Stock Exchange; however, it has also been registered for distribution across much of Europe including the UK, France, Italy and Germany. As of 18 August, the fund has sector weightings tilted towards financials (36.3%), industrials (15.0%), utilities (14.3%), telecommunications (12.3%), and consumer cyclical (11.6%). The current top holdings of the fund include Banco Santander (16.0%), Telefonica SA (12.3%), Industria de Diseno Textil (10.9%), Banco Bilbao Vizcaya (10.7%), Iberdrola (7.5%). The dividend yield of the index is currently 4.3%. It has a total expense ratio of 0.3%.

Other ETFs through which investors may gain exposure to Spanish equities include the SPDR MSCI Spain Quality Mix ETF (QESP) and the iShares MSCI Spain Capped ETF (EWP), both of which are listed on the NYSE Arca in US dollars. The appreciation of the US dollar versus the euro has recently hindered their performance relative to the db x-trackers ETF.

The SPDR MSCI Spain Quality Mix ETF tracks the performance of the MSCI Spain Quality Mix A-Series Index. It utilises a smart beta approach to represent the performance of a combination of three factors: value, quality and low volatility. It achieves this through an equal weighting of three separate factor indices within its own tracking index, namely the MSCI Spain Value-Weighted Index, the MSCI Spain Quality Index, and the MSCI Spain Minimum-Volatility Index. The fund, as of 18 August, is invested in the financials (32.6%), utilities (20.5%) and industrials (15.1%) and has significant exposure to Banco Santander (13.2%), Telefonica (11.0%) and Banco Bilbao Vizcaya (7.7%). The fund has a total expense ratio of 0.30%.

The iShares MSCI Spain Capped ETF tracks the performance of the MSCI Spain 25/50 Index and has become incredibly popular since its launch in March 1996, currently holding over $1.7bn in AUM. The fund, as of 18 August, has a large sector allocation to financials (44.4%), followed by telecommunications (13.0%), utilities (12.9%) and industrials (12.8%). Top holdings include Banco Santander (19.4%), Telefonica (13.0%) and Banco Bilbao Vizcaya (12.2%). The total expense ratio is 0.48%.

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