Banks Still Weighing On Europe ETFs

It's widely known that exchange traded funds focusing on U.S. banks have had some rough patches this year, but none have performed as poorly as the iShares MSCI Europe Financials ETF EUFN. That ETF is down more than 18 percent year-to-date and the problems being wrought by European banks are affecting ETFs beyond EUFN.

Italy has been a problem for EUFN. Italy is EUFN's seventh-largest country weight at just over 4 percent. As non-performing loans (NPLs) creep higher, investors mulling a stake in Italy ETFs or other Italy vehicles are pondering when reforms aimed at righting the banking sector, there will be implemented and how long it will take those reforms to have a noticeable, positive impact.

Italy's most recent NPL plan is not reminiscent of TARP during the financial crisis in that the country isn't looking to sell bad loans. However, complexities surrounding Italy's efforts to deal with its NPL crisis could limit participation by some of the banks residing in EUFN.

Italy's NPL problem is four times as dire as the European average. Making matters worse is that eight in 10 NPLs are corporate loans, which dampens banks' ability to increase non-financial sector loans.

However, other well-known Europe ETFs are being crimped by the region's banking woes. That includes the Vanguard FTSE Europe ETF VGK.

“VGK had $1.53 billion of outflows during the last two months, and year to date through July experienced $2.61 billion of redemptions. The ETF, which has the lowest expense ratio among peers at 0.12%, is diversified across sectors, but financials (19.0% of assets) is the largest. HSBC Holdings PLC is among the top-20 positions. VGK's ranking is aided by the strong qualitative risk assessment of its holding,” said S&P Capital IQ in a note out Tuesday.

Like EUFN, VGK is not a dedicated Eurozone ETF as U.K. and Swiss stocks combine for over 45 percent of the Vanguard ETF's weight.

Still, some Eurozone ETFs are feeling the effects of struggling banks in the region. For example, the SPDR EURO STOXX 50 ETF FEZ allocates 21.4 percent of its weight to Eurozone banks.

"> FEZ's “asset base was relatively stable in the last two months. Redemptions increased by only $51.3 million, pushing its total outflows to $938.8 million year to date through July. FEZ has 21% in financials and also has top-20 stakes in Allianz, AXA, Banco Santander, BNP Paribas and ING Groep,” adds S&P Capital IQ.