Gavin Graham Goes for German ETF

11/02/2017 5:00 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

Germany's economy is undoubtedly doing very well. Unemployment is at 4.5%, the lowest since the Berlin Wall came down in 1989, and the IMF forecasts the economy will grow at above 2%, notes Gavin Graham, contributing editor to Internet Wealth Builder.

Germany is the largest manufacturer in the world after China and the U.S. and has benefited enormously from the relative weakness of the euro over the last few years.

German exports are booming, reaching $1.32 trillion last year (all numbers in U.S. dollars). German leadership in autos, machinery, chemicals, aircraft, and capital equipment has resulted in a massive trade surplus, totaling $273 billion in 2016.

The German federal election in late September did not give long-serving Chancellor Angela Merkel a decisive mandate. Instead, it created further uncertainty.

Nonetheless, from an investor's point of view, this is not all bad news. Political uncertainty in Germany, the EU's leading economy and paymaster, means that the euro will likely remain relatively weak, thus helping German exports and competitiveness.

Investors should look at a German ETF to gain exposure to the exporters that provide Germany's prosperity. My recommendation is the iShares MSCI Germany ETF (EWG).

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The fund has been around over two decades, dating back to 1996. Results were poor in 2014 and 2015, with the fund recording losses in both years as Europe struggled with a series of crises.

Last year was slightly better, with a modest gain of 2.06%. But the fund has really taken off in 2017 with a year-to-date return of 25.7%.

The fund holds 59 positions. About 18% of the assets are in consumer discretionary stocks, primarily automakers. Another 14% is in materials such as chemical makers and 14% in industrials. Almost half its assets provide exposure to major export sectors.

Add in healthcare (13.5%) and technology (10%) and the ETF represents those sectors that benefit from global demand for top quality manufactured products.

Most of its financial weight (10% of 15%) is in global insurers, meaning there's not too much exposure to continental banks' large holdings of Eurozone government debt.

The fund has assets under management of almost $4.7 billion (figures in U.S. dollars). The portfolio p/e ratio is 17.24. It has a reasonable expense ratio of 0.48%.

Payments are distributed twice a year, in June and December. The fund paid $1.19 in dividends over the last 12 months for a yield of 3.64%. Overall, the fund is a buy for continued growth in German manufacturing and exports, helped by a relatively weak euro.

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