(By Ron) Europe's financial crisis just keeps getting worse. Politicians, bankers, and diplomats can talk themselves blue, but it won't help. None of the options are good.
The euro zone's largest economy is Germany. In fact, ranked by nominal GDP, Germany is the fourth-largest economy in the world. Yet we hear surprisingly little about investment opportunities in the Continent's industrial powerhouse.
Today I'll tell you about two ETFs that allow U.S. investors to play the German stock market. As you'll see, they hold some familiar names.
Germany Runs the Show
The division of Germany into "East" and "West" may as well be ancient history for today's college students. Many weren't even born when the Iron Curtain fell in 1989. Yet reunification created the Germany they now know.
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| Kids today don't remember this. |
That successful transition is one reason Germany wants the whole continent pulling together. The euro currency free-trade zone had another advantages for Berlin, though …
German companies spent the last decade running a massive export surplus with their neighbors. They've invested that surplus in places like Greece, Ireland, Italy, and Spain — in effect creating new markets to buy German goods.
Furthermore, German factories and workers are vastly more efficient than the rest of Europe. Other countries simply can't compete. With German companies now operating in the whole continent, Berlin holds a clear lead.
What will happen in the euro zone? I don't know, but my guess is that German banks and businesses will still be standing when the dust settles.
And at some point, I think U.S. investors will have a great opportunity to buy into Germany's stock market at a good price — through ETFs. Here are the two top contenders …
iShares MSCI Germany Index Fund (EWG)
EWG is the largest and best-known Germany ETF. I've followed it for years.
The "MSCI" part of the name stands for Morgan Stanley Capital International, which provides an index tracked by fund sponsor iShares.
The top holdings in EWG as of June 11 are:
- SIEMENS 9.1 percent
- BASF 8.7 percent
- SAP 7.3 percent
- BAYER 7.1 percent
- ALLIANZ 5.6 percent
- DAIMLER 5.4 percent
- DEUTSCHE BANK 4.5 percent
- E.ON 4.4 percent
- DEUTSCHE TELEKOM 3.8 percent
- LINDE 3.5 percent
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| Germany runs the shop now. |
Most of the names on this list are probably familiar. Even if you've never been to Germany, I'll bet you have taken a Bayer aspirin.
Daimler, by the way, is the parent company of Mercedes-Benz. You may recall they swooped in to buy Chrysler a few years ago. They got a great deal.
The companies in EWG may be big, but they aren't necessarily the best the country has to offer. That's why you should also keep an eye on …
iShares MSCI Germany Small Cap Index Fund (EWGS)
Don't get EWGS confused with EWG, although this relatively new ETF comes from iShares, too. Its specialty: Germany's up-and-coming small-cap stocks.
The top ten holdings in EWGS are not so well-known. You may not recognize any of them, in fact. Here they are:
- MTU AERO ENGINES HOLDING 5.1 percent
- RHOEN-KLINIKUM 4.7 percent
- BILFINGER BERGER 4.7 percent
- SYMRISE 4.6 percent
- WIRECARD 2.8 percent
- FUCHS PETROLUB -PFD 2.5 percent
- SOFTWARE 2.4 percent
- RHEINMETALL 2.4 percent
- STADA ARZNEIMITTEL 2.3 percent
- DEUTSCHE EUROSHOP 2.3 percent
A look at the sector allocations for EWG vs EWGS may tell you more than the company names. While most of the sector weightings are similar, the small-cap ETF has significantly greater involvement in German Industrial and Technology stocks — key engines of Germany's export economy.
Why does this matter? EWGS — at least with its current composition — is in far better position to prosper from economic recovery in Europe. Yes, small-cap stocks tend to be more volatile, but they can also have greater growth potential.
Of course, now may not be the time to buy EWG, EWGS, or anything else from Europe. The opportunity will come, though. Put these tickers on your watch list and be ready to move when the time is ripe!
Best wishes,
Ron
P.S. It might not be the right time to invest in Germany, but there are a host of other opportunities around the world for you to consider. To learn why international ETFs are the best way to tap these markets, turn up your speakers and click here.
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