Topic: ETFs

Exports decide this German ETF’s success

Germany ETF LISTEN:  

The German economy is still the largest in Europe and ranks among the top-five globally. However, in the near term, it faces challenges as its all-important export industry deals with the U.K.’s threat to leave the European Union without a trade deal. It also faces slowing demand for its products in China and elsewhere.

Here is one ETF that provides exposure to the top public companies in Germany.

ISHARES MSCI GERMANY ETF $27.24 (New York symbol EWG; TSI Network ETF Rating: Aggressive; Market cap: $2.0 billion) invests in publicly listed German companies.

Financial companies account for 19.9% of its assets, while Consumer Cyclicals (18.1%), Industrials (14.4%), Technology (12.6%), Basic Materials (12.3%), and Healthcare (11.5%) are other key segments.

The ETF holds a portfolio of 65 stocks; the top 10 make up 55% of its assets.

Top holdings include SAP SE (technology; 10.2%), Allianz (financial services, 8.2%), Siemens AG (industrials, 6.6%), Bayer (healthcare, 6.0%), BASF (basic materials, 5.2%), Deutsche Telecom (communications; 4.8%), Adidas AG (consumer, 4.6%), Daimler (consumer, 3.7%), Munchener Ruckversicherungs Gesellschaft (financial services, 3.2%) and Deutsche Post (industrials, 2.8%).

The ETF started in March 1996 and charges an MER of 0.47%. It has a large asset base and offers excellent liquidity with an average of $96.2 million in units trading daily.

The fund pays a dividend once a year; this amounted to $0.74 over the past 12 months for a yield of 2.7%.

The ETF lost 13.8% over the past year compared to a 1.5% loss for the MSCI World Equity Markets Index. Over the past 5 years, the fund gained 1.0% compared to a gain of 32.8% for the world markets index.

The German economy measured $3.7 trillion in 2018 and ranked as the 5th-largest economy in the world. It is also the largest economy among the 28 member countries of the European Union. The population count is 80.5 million with a workforce of 45.9 million. Its unemployment rate of 3.8% is relatively low.

The main strength of the German economy is its highly advanced industrial sector, which drives the strong performance of the export sector. This accounts for 47% of the country’s economy.

The main export categories are motor vehicles, machinery, chemicals, computer and electronic products, electrical equipment, pharmaceuticals, metals, transport equipment, foodstuffs, textiles, rubber and plastic products.

The bulk of the country’s trade is with Europe; exports to the European Union accounted for 36% of the total. Of that, exports specifically to the U.K. amounted to 6.6% of the total.

The trading relationship between the Britain and the European Union is very important for Germany. The U.K.’s proposed exit from the EU will have a significant impact on German exports and the economy.

That’s especially so if no trade agreement is finalized before Britain’s exit (“Brexit”), as soon as October 31, 2019.

After several years of real GDP growth averaging over 2% annually, Germany’s economy slowed sharply in the second half of 2018. There are now recession fears.

This reflects a mixture of weak external demand and specific factors affecting the auto and chemical industries. Expectations of a contraction are strongest among business executives in the manufacturing sector.

In 2018, the German economy grew by 1.5%, but is expected to grow by only 0.7% in 2019 and by 1.2% in 2020.

The country runs a government budget surplus of 1.7% of its GDP. That makes German the only country among the G7 to have government revenues exceeding expenditure.

A constitutional amendment approved in 2009 limits the federal government to structural deficits of no more than 0.35% of GDP per annum as of 2016.

Government debt is reasonable at 60% of GDP. Inflation is low at 1.7%; the European Central Bank deposit facility rate is currently at negative 0.4%, while 10-year German government bond yields are at negative 0.71%.

The rating agencies consider the country’s external debt to be of a high investment grade.

Germany uses the euro as its functional currency. It now trades close to its lowest level against the U.S. dollar in more than 10 years. Some observers argue that the euro weakness, which is influenced by the monetary policy as set by the European Central Bank, unfairly benefits German exports.

All in all, to sum up, as an export-oriented economy, Germany faces a number of challenges. The trade war between China and the U.S., two of Germany’s biggest trade partners, adds uncertainty. The final terms of Brexit and its effect on the European economy is also unclear. Still, the country’s outlook remains positive.

German Chancellor Angela Merkel has said that she will step down as her party’s leader before the next general election in 2021. Meanwhile, though, the coalition government between her Christian Democrat party and the Social Democrats continues to hold. That political alliance requires her to keep spending high, mostly on social welfare programs. But while that’s a departure from Germany’s traditional fiscal restraint, the spending should keep stimulating economic growth.

For Canadian investors who want exposure to top German companies, the iShares MSCI Germany ETF is a buy.


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