Irish Eyes Aren't Smiling About Brexit

Prior to the Brexit decision, the iShares MSCI Ireland Capped ETF EIRL, the lone exchange traded fund dedicated to Irish equities, was struggling. Along comes the Brexit stunner and EIRL was among the many Europe single-country ETFs that sank more than 10 percent last Friday.

Even after rebounding the past couple of sessions, EIRL is still saddled with a year-to-date loss of over 15 percent. However, if this week's market action is any indication, investors are quickly getting over the Brexit shock, a scenario that could be creating opportunity with ETFs tracking some of the sturdier European nations. Additionally, flows data suggest investors are using Brexit to scoop up some single-country Europe ETFs, not sell these funds. 

Related Link: It's Not All About Departures From Europe ETFs

Still, EIRL has the potential to be a good news/bad news play for investors. Geography indicates Ireland's economy has significant Brexit exposure.

“Ireland's economy is highly exposed to Brexit. According to the Central Statistics Office (CSO), the UK accounted for 12.6% of Ireland's total goods exports in January-April 2016, and 24% of total goods imports. The UK also accounted for 20% of total services exports in 2014. Total goods and services exports to the UK are equivalent to around 17% of GDP. There could be significant sector-specific fall out. For example, the UK accounts for 49% of Irish agricultural exports,” said Fitch Ratings.

As it pertains to EIRL, the ETF is really a two sector pony as materials and consumer staples combine for over 53 percent of the fund's weight. So it's possible one or both of those groups remain sturdy in the face of Brexit, which could allow EIRL to do the same. That's a stretch, but not impossible.

EIRL allocates 12.5 percent of its weight to financial services, a group almost universally viewed as vulnerable in Brexit's wake. That is EIRL's fourth-largest sector exposure. EIRL has a three-year standard deviation of 15.5 percent.

“Our upgrade of Ireland to 'A' from 'A-' in February reflected the marked fall in government debt to 93.8% of GDP in 2015 from 120% in 2013 driven by strong and broad-based growth and fiscal consolidation. While negative, Brexit is unlikely to undermine the progress that Ireland has made in these areas. Fitch expects debt/GDP to fall in the medium term, helped in part by lower nominal interest rates,” adds Fitch.