Hay Problemas For The Spain ETF

Relatively speaking, the iShares MSCI Spain Capped ETF EWP has not been that bad compared to other single-country exchange-traded funds tracking PIIGS economies. Year-to-date, EWP is down 3.8 percent, a loss that is only half as bad as the equivalent Ireland ETF and far superior to the average loss of 14.5 percent for the comparable Greece and Italy ETFs.

As is the case with other members of the PIIGS group, there have been lingering concerns about the health of Spanish banks. However, there are signs banks in the eurozone's fourth largest economy are regaining some health. The health of Spanish banks is of particular importance to EWP because the Spain ETF, as is the case with so many single-country funds, devotes a significant percentage of its weight to financial services names.

The problem is market observers are becoming concerned with other corners of the Spanish economy, and some data points suggest those concerns are warranted.

“Latest IHS Markit PMI data for Spain signalled that, while the service sector continued to expand at a solid rate during August, helped by record tourism numbers, the manufacturing sector appears to be heading towards stagnation. Production rose at the slowest pace since the end of 2013 amid a marginal gain in new work. Monthly official data on manufacturing production signalled the slowest annual rise for a year-and-a-half in July,” said Markit in a recent note.

While financials are by far EWP's largest sector weight at nearly 35 percent, the largest Spain ETF is more than adequately leveraged to the country's manufacturing cycle with a combined 35.8 percent of its lineup devoted to industrial and utilities stocks.

EWP's struggles and those of Spanish stocks could be signs that interested investors should approach the largest Spain ETF and its rivals with caution. Political instability is a big reason why Spanish stocks and EWP are lagging broader European benchmarks and diversified Europe ETFs. Political uncertainty, a problem that can plague stocks in any developed or emerging market, is seen as derailing Spain's long, tenuous economic recovery.

While concerns over Spanish have ebbed somewhat, that merely serves to put the spotlight on economic data, for better or worse.

“This doesn’t mean that the economy hasn’t been harmed by the lack of a permanent government – growth across both sectors in 2016 has been lower than the strong rates seen in 2015 and could potentially have been higher in a more certain political environment,” added Markit.

As the research firm noted, Spain-related ETFs have averaged outflows every month over the past year.

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