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German ETFs Rally on Strong Industrial Output

Germany’s industrial output increased 2.6% in August on a monthly basis compared with a 0.1% fall in July. This was the largest monthly increase in six-years. Solid growth in industrial output has increased market optimism about a better-than-expected GDP growth reading for the third quarter, which in turn helped the DAX log an all-time high.


Solid growth in auto manufacturing led the way for higher industrial output. Overall, manufacturing output increased 3.2% in the month.


Economic Data


German GDP increased 2.1% year over year in the second quarter of 2017, following 2.0% growth in the previous quarter. Moreover, certain economic institutes now expect the German economy to expand 1.9% and 2% in 2017 and 2018, respectively (read: German GDP Rises in Q2: ETFs in Focus).


Consumer prices in Germany increased 1.8% in September, unchanged from August and below a Bloomberg survey estimate of 1.9%.


Adjusted for seasonal swings and inflation, factory orders in Europe’s largest economy grew 3.6% in August compared with a decline of 0.4% in July. Orders were buoyed by foreign demand, while economists expected a 0.7% gain.


Risks Involved


The German economy faces risks from a rising euro, as it will hurt export demand. The euro is up almost 11% against the dollar so far this year.


Europe’s largest economy has become prey to a lot of political uncertainty. Angela Merkel secured her fourth term as Chancellor of Germany but her party, the Christian Democratic Union (CDU), witnessed its worst results since 1949. From the 2013 election, CDU’s share declined 8.5 points to 33%.


Merkel is set to open talks on a first-ever coalition between CDU, Greens and liberal Free Democrats, after she agreed to a deal to set a cap on the number of refugees to be allowed into Germany ever year. Adding to the agony of the investors, despite being traditional allies, a coalition with the FDP and the Greens has not been tested at a national level (read: Merkel to Secure Fourth Term as Chancellor: ETFs in Focus).


Moreover, uncertainty surrounding the fate of Catalonia is weighing on European markets (read: How Catalonia Dispute May Impact Spain ETFs).


Let us now discuss a few ETFs that are primarily focused on providing exposure to German equities (see all European equity ETFs here).



iShares Currency Hedged MSCI Germany ETF HEWG


This fund is an appropriate bet for those looking to gain exposure to Germany without betting on the euro and is the hedged version of EWG. We believe it is best to remain hedged to the currency till political uncertainty in the region is dealt with.


HEWG has AUM of $683 million and charges 53 basis points in fees per year. Consumer Discretionary, Financials and Materials are the top three sectors of this fund, with 18.4%, 15.2% and 14.3% allocation, respectively (as of Oct 6, 2017). The top three holdings of EWG are Bayer AG, SAP and Siemens AG with 8.0%, 7.7% and 7.6% exposure, respectively (as of Oct 6, 2017). HEWG has returned 9.4% year to date and 19.1% in a year (as of Oct 9, 2017). As such, HEWG currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


WisdomTree Germany Hedged Equity Fund DXGE


This fund seeks to provide exposure to German equities without betting on the euro.


DXGE has AUM of $116.1 million and charges 48 basis points in fees per year. Consumer Discretionary, Industrials and Financials are the top three sectors of this fund, with 23.7%, 18.3% and 17.0% allocation, respectively (as of Oct 9, 2017). From an individual holdings perspective, Allianz SE, Daimler AG and BASF SE are the top three holdings of the fund, with 6.7%, 5.9% and 5.9% allocation, respectively (as of Oct 9, 2017). It has returned 9.5% year to date and 19.3% in a year (as of Oct 9, 2017). As such, DXGE currently has a Zacks ETF Rank #3 with a Medium risk outlook.


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