Politics Pressure Spain ETFs

Among the five single-country exchange-traded funds tracking PIIGS nations, the iShares MSCI Spain Capped ETF EWP has not been all that bad this year. What that means is EWP is down 4.6 percent, making it the best of the PIIGS ETFs on a year-to-date basis.

So EWP has really been less bad, a sign that interested investors should approach the largest Spain ETF and its rivals with caution. Late last year, as stocks on Spain's benchmark IBEX Index became heavily shorted, Spain ETFs became popular with global investors. However, the eurozone's fourth-largest economy faces renewed headwinds.

Political Concerns Weigh Heavy

Political uncertainty, a problem that can plague stocks in any developed or emerging market, is seen as derailing Spain's long, tenuous economic recovery.

Related Link: A Promising PIIGS ETF

“The Spanish economic recovery is showing signs of being held back by political uncertainty. The end of last week saw the Spanish Socialist Party leader Pedro Sanchez fail in his bid to become Prime Minister after lengthy talks following December’s election, thus extending the period of political uncertainty in Spain. We are now in a two-month period of consultation between the political parties after which a new election will be called if the talks are unsuccessful, as seems likely to be the case,” said Markit in a new note.

It's Not All Bad News In Spain

On the bright side, recent data show ongoing improvement in Spain's manufacturing and services sectors, groups EWP has some leverage to. For example, the Spain ETF allocates 22.5 percent of its combined weight to the industrial and consumer discretionary sectors.

Something to be aware is EWP, like rival single-country PIIGS ETFs, is heavily allocated to the financial services sector. That group is 36.6 percent of EWP's weight, more than double the ETF's weight to utilities stocks, its second-largest sector allocation. As the iShares MSCI Italy Index (ETF) EWI is showing, investing in a Europe ETF that tracks a country with a fragile banking system is a risky bet.

“There have also been signs that investors have been cooling with regards to their attitude to Spain in recent months. Funds exposed to Spain had seen net inflows through much of 2015 as the economy posted solid growth. While output in the economy continues to expand, investors seem to be looking elsewhere, with funds exposed to Spain having registered net outflows in each of the past six months, and at a stronger pace post-election,” said Markit.

There is something to that cooling sentiment as investors have pulled $266.1 million from EWP this year.