Ahead Of German Election, A Small ETF Surges

Germany, the eurozone's largest economy, holds national elections on Sept. 24 with Chancellor Angela Merkel widely expected to win another term. After a bout with some political volatility earlier this year, eurozone equities, including German stocks, face a more sanguine outlook into the end of 2017.

That point is underscored by the fact that several Europe exchange-traded funds hit record highs yesterday, including the oft-overlooked iShares MSCI Germany Small-Cap ETF (BATS: EWGS). The iShares MSCI Germany Small-Cap ETF is now up 45 percent year to date, more than double the gain posted by Germany's benchmark DAX Index.

The $48 million EWGS is more than five and a half years old and tracks the MSCI Germany Small Cap Index. EWGS holds almost 120 stocks.

Cheering For Merkel

At the moment, polls indicate Merkel will emerge victorious in the upcoming German federal elections. Still, investors should remember that some important national elections around the world have recently delivered surprising results. Markets want a Merkel victory.

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We believe A. Merkel win would likely be positive for markets, although we do not expect a strong reaction given that current polls show Merkel with a healthy lead, according to BlackRock. Instead, the makeup of the government could have greater ramifications. A Merkel win would likely lead to either the reinstatement of the current grand coalition between the conservative Christian Democratic Union-Christian Social Union (CDU-CSU) alliance and the Social Democrats (SPD), a new three-way coalition with the liberal FDP and the Greens, or even to a CDU/FDP coalition.

EWGS is up 6.5 percent over the past month, indicating investors are comfortable betting on a Merkel victory.

More To Consider

A Merkel win would likely lead to either the reinstatement of the current grand coalition between the conservative Christian Democratic Union-Christian Social Union (CDU-CSU) alliance and the Social Democrats (SPD), a new three-way coalition with the liberal FDP and the Greens, or even to a CDU/FDP coalition, said BlackRock.

A surprise defeat of Merkel could rock the euro, which has been one of 2017's best-performing developed market currencies. While that is simply speculation for the moment, the domestic focus of small-caps could somewhat insulate EWGS from a surprise outcome.

The ETF allocates over 27 percent of its weight to industrial stocks and a combined 32 percent to the technology and real estate sectors.

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_________ Image Credit: By Pete Souza - P060815PS-0281, Public Domain, via Wikimedia Commons