Deutschland Disappointment Could Hinder Germany ETFs

The iShares MSCI Germany ETF EWG, the largest Germany exchange traded fund trading in New York, is up 0.8 percent this year, a showing that tops those of diversified Europe and Eurozone ETFs. Yet, concerns linger that German stocks are poised to retreat.

Germany, the eurozone's largest economy, is often seen as a beacon of stability, particularly at times when volatility is high for the region's equity markets. However, EWG and rival Germany ETFs have slumped over the past year with currency hedged funds faring worse because of the faltering U.S. dollar. EWG is not currency hedged, but it has a currency hedge counterpart, the iShares Currency Hedged MSCI Germany ETF HEWG.

The iShares Currency Hedged MSCI Germany ETF simply holds EWG with a currency hedged overlay, designed to lift the ETF when the dollar rises against the euro. Often thought of as sturdy, particularly when compared to stocks in peripheral Eurozone nations, German shares are drawing some bearish bets.

“Shorts seem to be largely unconvinced by the recent rally in German blue chips with the DAX rising an impressive 19% from February lows. However, looking at the average short interest across the Stoxx 600, this seems to be a wider trend in Europe,” said Markit in a new research note. “German constituents in the Stoxx 600 are marginally more short sold than the broader index with the current average rising to 2.8%.. In fact German firm Wirecard is the most shorted stock across the Stoxx 600 with 24.5% of shares outstanding on loan.” 

Short interest in German stocks is rising even as one ratings agency recently reaffirmed the country's prestigious AAA credit rating while highlighting an enviable current account surplus and shrinking government debt.

The euro is something of a problem. The CurrencyShares Euro ETF FXE is up 3.3 percent this year as the European Central Bank has not delivered enough monetary easing to suit investors' tastes. Likewise, the Federal Reserve is not doing its part to embolden dollar bulls as rate hike expectations have consistently dwindled since the start of the year.

Investors in Germany ETFs are not waiting around to see what happens next.

“In the meantime however, local and foreign investors have withdrawn funds from German exposed ETFs with $2.1bn of net outflows recorded this year. Three consecutive months of outflows have been recorded totalling almost $3bn, the largest since December 2014,” adds Markit.