Banking On Good News For The Spain ETF

The iShares MSCI Spain Capped ETF (NYSE:EWP), the largest U.S.-listed exchange-traded fund tracking Spanish equities, is down about 2.6 percent year-to-date. Among developed Europe single-country ETFs, investors could find better-performing options, but they can also find plenty of funds lagging EWP.

So, EWP has really been less bad, a sign that interested investors should approach the largest Spain ETF and its rivals with caution. Late last year, as stocks on Spain's benchmark IBEX Index became heavily shorted, Spain ETFs became popular with global investors. However, the eurozone's fourth largest economy faces renewed headwinds.

As is the case with other members of the PIIGS group, there have been lingering concerns about the health of Spanish banks. However, there are signs banks in the eurozone's fourth largest economy are regaining some health. Cash dividends tell the story.

Cash Dividends

Cash dividends of Spanish banks are expected to increase for the third consecutive year, rising to 4.8 billion, according to Markit Dividend Forecasting. Investors however, have to face a 30 percent cut to aggregate banking dividends due to a 60 percent reduction in scrip dividends, declining to 2.5 billion, said Markit in a new research note.

Related Link: Politics Pressure Spain ETFs

During the worst days of the eurozone crisis, Spanish banks offered investors scrip dividends as a means of preserving cash. As Markit noted, scrip dividends do not really help or harm investors, but they do help the banks using that option because it helps avoid dividend cuts, a message that is rarely warmly received by financial markets.

Good News On The Horizon

The good news: Markit is forecasting more declines in scrip dividends while expecting increases in cash dividends from Spanish banks. As it pertains to EWP, this is important because the ETF allocates 36.3 percent of its weight to financial services stocks. That is nearly double the ETF's weight to utilities shares, its second largest sector allocation.

The resumption in cash payments has been modest and conservative in Spain and is a trend seen with peers in Europe. Overall European banks are struggling, with less than a third posting positive returns thus far this year. Markit is forecasting European banks dividends to reach pre-crisis levels of 44.3 billion. However, this represents growth of only 4 percent compared to 2015, added Markit.

When it comes to EWP holdings, investors will want to see positive cash dividend news from Banco Santander, S.A. (ADR) (NYSE:SAN) because that stock is 14.2 percent of the ETF's weight. No other stock commands more than 9.5 percent of EWP's weight. The Spain ETF yields nearly 4 percent on a trailing 12-month basis.

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