Italy’s sovereign debt trails only the US and Japan in size. For a relatively small nation with debt totaling 120% of GDP, $2.2 trillion in debt is a big deal. Yesterday’s action on the Milan exchange pushed Italian stocks to a two-year low.  In something of a surprise, markets in Europe have recovered a bit today as a sale of Italian bonds went off as planned and there are rumors that the European Union may buy Italian debt in an effort to forestall the drop in European stocks.  Possible buybacks of Greek and Italian debt are again part of the discussion and that has helped stabilize the markets.

ETF investors, though, need to keep their eyes on the larger picture in Europe. The Italy-specific iShares MSCI Italy Index ETF (NYSE: EWI), the Germany-specific iShares MSCI Germany Index ETF (NYSE: EWG), the Vanguard MSCI Europe ETF (NYSE: VGK), and the iShares MSCI EMU Index (NYSE: EZU) are good starting points.

The iShares MSCI Italy Index ETF (NYSE: EWI) has lost nearly -6% since the beginning of the year, though it’s only down by about -0.2% in the last 12 months. The fund is relatively small at $118 million, but it traded more than 2 million shares yesterday compared with average daily volume of about 435,000 shares. The NAV has fallen nearly -12% in the past week, including a drop of -6% yesterday.

The iShares MSCI Germany Index ETF (NYSE: EWG) has gained nearly 6% year-to-date and more than 28% in the past 12 months. The fund holds $3.6 billion in assets, of which about 17% are financial services equities compared with nearly 30% of EWI’s holdings in financials. Shares fell about -4.5% yesterday. Average volume is 3.1 million shares, and yesterday’s volume was 5.4 million.

The Vanguard MSCI Europe ETF (NYSE: VGK) has gained about 3.5% year-to-date and nearly 17% in the past 12 months. The fund holds $3.6 billion in assets, with financials making up 20% of the portfolio. The only Italian equity among the top 25 holdings is energy giant Eni SpA. Shares fell -3.6% yesterday on more than three times average volume of 1.1 million shares.

The iShares MSCI EMU Index (NYSE: EZU) has gained about 1.4% year-to-date and about 15% in the past 12 months. Shares fell about -4.7% yesterday. Nearly 21% of holdings are in financials, and only two Italian firms are among the top 25 holdings, Eni and Enel SpA. Total assets in the fund amount to $936 million and trading volume is relatively light at an average of about 500,000 shares/day. Yesterday’s volume hit about 770,000 shares.

EWI has taken a battering in the past week, but the overall picture for European equity ETFs is not too bright either. And while Italy is responsible for some weakness in the past few days, Greece is still the central problem.

How the Eurozone handles the Greek debt problem is still unclear, and none of the proposed solutions has really gained much traction yet.  As long as the richer countries — Germany, France, the Netherlands — resist a permanent solution that involves losses to banks and a much larger bailout fund, Greece is the lit fuse of Europe.

Paul Ausick

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