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Is the Ireland ETF No Longer A PIIGS Member? - ETF News And Commentary

Thursday, October 04, 2012

At the beginning of Europe’s financial crisis, Ireland was one of the hardest hit nations. The country suffered from a collapse in its property market, a sharp downturn in the employment level, and continued worries over pulling out of the malaise.

In fact, the country received a bailout from the ECB and the IMF to help its beleaguered banking sector while relatively harsh austerity measures were also enacted as well. These programs, and a generally gloomy tone in the country, ensured that Ireland was due for a severe rough patch in the coming months and years as it struggled to get back on track (read For Europe ETFs, It is Hard to Beat Switzerland).

While the country remains under pressure today, some positives are beginning to appear in the Irish economy, despite the downbeat tone over the broad euro zone area. If anything, the biggest help has come from a shifting focus away from their island nation and towards other markets on the continent such as Greece and now Spain and Italy.

The ongoing saga in Greece and the high bond yields in both Spain and Italy—economies which dwarf Ireland by multiples—have caused many investors to forget about Ireland and focus in on these other EU members. It also doesn’t hurt that Ireland appears to be in a ‘muddle through’ phase as well, allowing some investors to trend back into beaten down Irish stocks (read Three European ETFs that Have Held Their Ground).

If anything, Irish market performance so far in 2012 has been quite impressive, not only when compared to other high debt countries but when juxtaposed against strong markets as well. For example, of the other four nations in the PIIGS group, three have ETFs (EWP, EWI, and GREK) and all of them have significantly underperformed the Irish ETF, EIRL, both this year and over the past 52 weeks.

If that wasn’t enough, the iShares MSCI Ireland Capped Investable Market Index Fund (EIRL) has actually beaten out the German ETF (EWG), just barely, while it has also edged out the British ETF (EWU) in YTD period, suggesting that the Ireland ETF has been—shockingly—a relative safe haven year-to-date in the European ETF world.

Arguably, one could make the case, at least based on market performance this year, that Ireland’s membership in the PIIGS group may no longer be warranted. After all, the country has outperformed the rest of the five country bloc so far in 2012 by a wide margin, and it has even edged out the German juggernaut this year as well (see Three Forgotten Ways to Play Europe with ETFs).

So while the attitude over the health of the Irish economy may not have improved too much, it is hard to argue with the performance of the ETF tracking the nation. The fund has not seen the same volatility than products tracking Spain or Greece, or even Italy, have seen this year, suggesting that possibly the worst may be behind EIRL (see Will The Luck of the Irish ETF Continue?).

This could be especially true if Germany remains relatively accommodative in its policies, helping to keep a risk on atmosphere across the broad European region. This trend could allow Ireland to continue its slow recovery and help Irish stocks add to their bullish run.

However, on the flip side, even during times of turmoil—as we saw in May and June of this year—it appears as though Irish securities are not in as much danger as some of their PIIGS peers. The focus looks to remain on the trillion dollar economies of Italy and Spain for at least the time being, potentially allowing Ireland to continue to fly under the radar (see Beyond the PIIGS, Three Troubled European ETFs to Watch).

Given this, investors may want to consider separating EIRL from the rest of the PIIGS bloc from a risk/return perspective. Clearly, investors are beginning to divide up the space into various risk buckets, and if the trend from earlier in the year holds, investors could consider EIRL as a relatively lower risk play on the reasonably weak economies of Europe.

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Disclosure: Long EWG


 
ISHARS-MS IRLND (EIRL): ETF Research Reports
 
ISHARS-GERMANY (EWG): ETF Research Reports
 
ISHARS-ITALY (EWI): ETF Research Reports
 
ISHARS-SPAIN (EWP): ETF Research Reports
 
GLBL-X/F GREC20 (GREK): ETF Research Reports
 
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