GGOV Proshares German Sovereign Sub Soverign Etf (delisted)

Economic conditions in the euro zone are still uncertain as Spain and Greece continue to face intense fiscal troubles. Many investors are naturally trying to reconsider their exposure to the region and are instead focusing in on the best nations in the common currency bloc.

For these investors, the industrial powerhouse of Germany continues to be an attractive location for capital seemingly no matter what the final outcome is in the bloc.

Germany: The King of Euro Zone

Germany is arguably the strongest performer in the euro zone and the biggest economy of Europe. In fact, the country is pretty much assisting all the weak euro zone nations, preventing them from defaulting on debt thanks to more purchases of sovereign debt via bailout funds (read: German ETFs On The Rise).

This continues to be the case as evidenced by the G20 summit in Mexico held on June 19, where German chancellor Angela Merkel declared her support for the use of the Euro zone’s bailout fund to buy debts of distressed nations like Spain and Italy. This will reduce the borrowing cost for the periphery and hopefully prevent the euro currency from collapsing.  

Strong Outlook for Germany

The German economy escaped recession and returned to a healthy growth rate of 0.5% in the first quarter after shrinking slightly in the fourth quarter last year. The better-than-expected improvement was driven by strong exports and a low unemployment rate (read: Three European ETFs Beyond The Euro Zone).

The unemployment rate declined to 6.7% in May, the lowest level in 20 years. The German central bank also successfully lowered its debt to 81% of GDP in 2011 from 83% in 2010. The nation also still possesses an ‘AAA’ credit rating from all the three rating agencies – Standard & Poor, Fitch and Moody’s-- for the long term.

After growing at an average rate of 3% last year, Germany is expected to slow down to 0.7% this year. However, many forecast this as a temporary drop as the economy will, according to the central bank, rebound to a 1.6% growth next year.

Meanwhile, both inflation and interest rates remain low at 1.9% and 1.0%, respectively, suggesting that the country has strong policy tools at its disposal to prevent a crisis.

Germany is an export driven economy, enjoying a huge trade surplus pretty much continuously over the past few decades. In fact, the country has the third highest current account surplus, trailing only China and Saudi Arabia in this metric.

It mainly exports manufactured goods such as automobiles, machineries, chemicals, and iron and steel products. However, the euro zone is the largest trading partner of Germany (accounting for about 40% of the exports), followed by the U.K. and U.S.

The slowdown in other Eurozone countries like Greece, Spain and Italy continues to weigh on the Euro currency, which in turn, is benefiting Germany (Read: How To Play The Spain ETF (And The Euro Zone Slump)). That is because a weak euro is helping Germany to a certain extent as it is making quality exports cheaper and competitive in the world market compared to Japanese or American goods.

Ironically, the Eurozone crisis has not only strengthened exports but has made Germany the second largest export economy in the world after China. The country also has a small budget deficit, coming in below 2% and a robust level of foreign reserves (including a huge supply of gold).

Besides, the country’s well-equipped infrastructure, lower business costs, fair labor laws, and efficient transport system, the country’s central location and large market size and low unemployment levels make the country a safe bet for investors seeking exposure to the euro zone without a great deal of risks.   

Potential Threats

However, the German growth poses a major risk to the unresolved sovereign debt crisis. The slump in the euro zone economies and U.K. might hurt the country’s export ability throughout the year. Further, additional reforms implemented by other countries might be detrimental, as it could make German exports more expensive or less in demand (read: Beyond Germany: Three European ETFs Tracking Strong Countries).

Further, some investors may be worried that Germany may be forced to foot much of the bill for the Eurozone crisis. If Germany does give in and plunk down cash for the periphery, it could hurt the overall economy.

With that being said, we still believe Germany’s economic and political conditions are stronger relative to other developed European countries, compelling investors to play there over the other markets in the region. Investors can consider both German equity and bond ETFs in their portfolios, each of which we have highlighted below:

German Equity ETFs

German assets in the ETF world have been increasing at a solid rate year-to-date, especially when comparing fund flows among European nations. This implies that the funds have become an increasingly congested trade as of late, as more dollars move into this strong nation. Investors have a handful of choices to play German equities via ETFs:

iShares MSCI Germany ETF (EWG)

Launched in March 1996, EWG is the largest and the most popular German ETF having AUM of $2.5 billion. The fund tracks the MSCI Germany Index and provides exposure to the largest German equities. 

The fund uses a replication strategy holding 53 securities in the basket. It puts around 60% of the assets in top 10 firms with Siemens (SI) and BASF (BASFY) alone comprising 6% share each. The product is heavy on consumer discretionary, financials and materials (Read: Lower Wal Mart Exposure with These Consumer ETFs).

The ETF trades with good volumes of about five million shares on an average daily basis, and charges 53 bps in fees from investors. It has produced a decent year-to-date returns while yielding 3.42% dividends annually.

Market Vectors Germany Small-Cap ETF (GERJ)

Investors looking for a small cap approach in the German market may find GERJ an intriguing option. Launched in April 2011, this ETF seeks to match the price and performance of the Market Vectors Germany Small-Cap Index, before fees and expenses. With holdings of 92 securities, the fund includes Germany domiciled/listed companies or the companies that generate the majority of their revenue in Germany.

The fund has a low level of concentration in the top 10 holdings, putting only 31% of the assets in these securities. However, it puts deeper focus on companies like Symrise AG, which alone makes up for 6% share, while Wirecard AG and Fuchs Petrolub AG combine to make up a 6.6% share as well.

The product is also heavy on industrials that make up about 29% of GERJ, while financials and information technology companies combine to make up 31%. (Read: Euro Small Cap ETFs: The Way to Play Europe?)

Trading in small volumes, the fund assets managed to reach $4.8 million and charges 55 bps in fees per year. It returned an impressive 5% year-to-date with a good distribution yield of 0.77%.

First Trust Germany AlphaDEX Fund (FGM)

This is a new fund issued by First Trust in February 2012 and provides exposure to the German stock market by employing AlphaDEX methodology. This methodology uses fundamental growth and value factors to select stocks from the S&P Germany BMI universe.

Hopefully by using this methodology, and giving higher weights to more favorably ranked firms, FGM should generate positive alpha relative to traditional passive indices (Read: First Trust Planning More AlphaDEX ETFs).

In terms of the portfolio, the product is highly exposed to three main sectors – industrials, materials and consumer discretionary – each representing 20% share on average. From an asset individual perspective, the fund puts assets in equal weightings of about 4% in top 10 companies.

With AUM of $4 million, this product is quite expensive relative to the other funds in the space, as it charges an annual fee of 80 bps. Unfortunately, the low trading volumes and the poor timing of the launch have contributed to a weak performance so far for the ETF.

iShares MSCI Germany Small Cap Fund (EWGS)

EWGS, launched in January 2012, is the other option available for Investors seeking small cap exposure in Germany. The product has total assets of $2.5 million under its management and seeks to replicate the performance of the MSCI Germany Small Cap Index, holding about 97 stocks in the basket.

Similar to GERJ, the fund is heavily weighted towards industrials making up for 30% alone (Read: Three Industrial ETFs Outperforming XLI). The fund puts 34% of its assets in top 10 companies, with MTU Aero Engines Holding AG, Bilfinger Berger SE and Symrise AG as the top three players.

Trading in small volumes, the product has generated negative return of 11.7% since inception. Additionally, the fund is quite expensive relative to GERJ, charging 59 bps in fees per year.

German Bond ETFs

German bond ETFs have been in demand as of late with more asset inflows. Amid Eurozone debt worries, these ETFs act as a safe haven play for the long-term investors. (Read: Follow Buffett With These Developed Market Bond ETFs).

However, investors should note that yields are pretty weak, and in fact, the two year German Bund recently reached a zero percent yield.

Currently, investors can play this slice of the market in four ways:

ProShares German Sovereign/Sub-Sovereign ETF (GGOV)

This is a new fund issued in January 2012 and provides investors with exposure to investment grade debt. The fund seeks to match the performance of the Markit iBoxx EUR Germany Sovereign & Sub-Sovereign Liquid Index, before fees and expenses. (See more ETFs in the Zacks ETF Center)

The product holds 34 Euro-denominated bonds with heavy focus on short and intermediate term corporates. It includes all term bond maturity, ranging from one year to 10 years.

This ETF with AUM of $4 million is cheap, charging only 45 bps a year in fees. GGOV delivered negative return of about 3% year-to-date while it still trades in small volume amounts.

PIMCO Germany Bond Index Fund (BUND)

Launched in November 2011, this fund tracks the performance of the BofA Merrill Lynch Diversified Germany Bond Index, net of fees and expenses. The ETF focuses on Euro-denominated investment grade bonds issued by German entities including sovereign, quasi-government, corporate, securitized and collateralized debt. (Read: PIMCO Files For Three More Active Bond ETFs)

The product holds 52 bonds in its basket with nearly 41% concentrated in the top 10 holdings. Land Nordrhein-Westfalen takes the top spot in the basket followed by the Deutschland government bonds in the next two spots. The fund trades in low volumes of less than 1,000 shares on a daily basis.

With total assets of $2.9 million, the fund has a low effective duration of 4.03 years and average yield to maturity of 1.29%. The product is cheap as it charges 45 bps in fees per year. The fund returned about 1% year-to-date and yields 0.33% per annum. This bond ETF is suitable for investors seeking broad exposure in both German corporates and treasury securities.

PowerShares DB German Bund Futures ETN (BUNL)

Launched in March 2011, the ETN seeks to match the DB USD Bund Futures index, replicating the performance of a long position in Euro-Bund Futures. The product is designed to provide returns of a German bond futures index in U.S. dollar terms.

The underlying assets of this contract are Federal Republic of Germany-government issued debt securities with time remaining until maturity of at least eight years and six months but not more than 10 years and six months. (Read: Seven Biggest Bond ETFs By Assets Under Management)

The ETN consists of senior unsecured debt of Deutsche Bank, which pays investors a return equal to the index. With AUM of $32 million and trading in small volumes, BUNL charges 50 bps in fees per year from investors. The product delivered a decent return of 3.14% year-to-date and an impressive return of 16.10% over the last one year (as of March 2012).

PowerShares 3x German Bund Futures ETN (BUNT)

This is a leverage ETN and provides three times (3x) the rate of return that investors see in BUNL. It is the high cost product in the space, charging 95 bps in fees annually. With AUM of 43.3 million, the fund generated excellent returns of 55% over the last year (as of March 2012) with year-to-date return of 11.6%. 

BUNT trades at a lower volume of about 17,000 daily shares on average relative to BUNL, which trades around 22,000 shares per day.

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PIMCO-GER BIF (BUND): ETF Research Reports
 
PWRSH-DB GBF (BUNL): ETF Research Reports
 
PWRSH-DB 3X GBF (BUNT): ETF Research Reports
 
ISHARS-GERMANY (EWG): ETF Research Reports
 
ISHARS-MS GRMSC (EWGS): ETF Research Reports
 
FT-GERMANY (FGM): ETF Research Reports
 
MKT-VEC GER SC (GERJ): ETF Research Reports
 
PRO-GRMN SOV/SS (GGOV): ETF Research Reports
 
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