Armani, Gucci, Italy ETFs

Neither the Italian economy, the eurozone's third-largest, nor the country's equity market have had the pizzazz of the country's famous automakers and fashion in recent years, but there are signs that Italy could be awakening from a long slumber.

That could be enough to bring investors to the iShares MSCI Italy Index (ETF) EWI, the largest Italy ETF trading in New York.

As it is, EWI is up 5.3 percent this year, making it the second-best performer among the single-country ETFs tracking PIIGS economies.

Only the iShares MSCI Irld Cp Invstb Mrkt Indx Fd EIRL has outperformed EWI.

Is A Recovery Ahead For EWI?

However, EWI's road to full fledged recovery is unlikely to be bump free. The ETF's three-year standard deviation of 20.1 percent confirms as much.

By comparison, the MSCI Emerging Markets Index has a three-year standard deviation of just 14.1 percent.

Additionally, a legitimate Italian economic miracle is likely to be more of a slow slog than an overnight miracle.

“The upturn in Italy was in some ways different from what took place in neighboring countries,” said Standard & Poor's in a new research note.

“First, it's been weaker: Real GDP rose 1.2 percent in the eurozone as a whole in the first half of the year (0.7 percent for Italy). Second, the upswing in the eurozone was primarily consumer driven.”

Related Link: Playing With PIIGS...ETFs That Is

Consumer-Driven Recovery And Its Effect On Italy

In theory, a consumer-driven recovery should have benefited Italy and EWI more as the ETF has an almost 11 percent weight to discretionary stocks.

However, bad loans are hampering Italian banks and the financial services sector is a significant portion of the Italian equity market's market value. The sector is 40.1 percent of EWI's weight, or about two and a half times the ETF's second-largest sector allocation, utilities.

“The Italian bank sector remains vulnerable and is not in an ideal position to support private investment,” said Standard & Poor's. “All categories included – bad debt, substandard, past due and restructured – non-performing loans (NPLs) have tripled since 2007 to reach a historical high of 24 percent of GDP in June 2014, or 16.8 percent of total loans.”

Said another way, as S&P noted, 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.

Increased Profitability On The Horizon?

Investors willing to bet on increased profitability for Italian banks, a concept that could take a while to materialize, and an ongoing improvement in the country's industrial sector (11.7 percent of EWI's weight), while making a wager against the euro can consider the iShares Currency Hedged MSCI Italy ETF HEWI.

HEWI, which debuted June, is essentially EWI with a euro hedge overlay. The ETF has already attracted nearly $94 million in assets under management, making it one of the most successful ETFs to debut this year.

Another idea is the Deutsche X-trackers MSCI Southern Europe Hedged Equity DBSE, also a currency hedged ETF.

DBSE, which debuted last month, is the closest fund on the market today to a true PIIGS ETF.

Looking a little closer, DBSE is essentially a combination Spain/Italy ETF, as the countries combine for 95 percent of the fund's weight; however, that country mix could prove advantageous going forward.