Looming Election Could Challenge Italy ETFs

This article was originally published on ETFTrends.com.

The iShares MSCI Italy Capped ETF (NYSEArca: EWI) is up about 6% year-to-date, but challenges linger in the form of Italy's upcoming national election.

Italy is still struggling with issues within its banking sector, an important consideration with EWI because financial services is the largest sector allocation in the largest Italy exchange traded fund. The Italian government has been under pressure to calm concerns over its ailing banking system, which underperformed in the European Central Bank’s 2014 financial stress test and is holding €360 billion, or $410.5 billion, in bad loans.

“Our base case for the March 4 Italian general elections is a hung Parliament leading to a grand coalition between the major centrist parties,” said BlackRock in a recent note. “However, we encourage investors to follow the election in case of a surprise showing by populist parties leading to renewed questions over the future of the eurozone.”

The $719 million EWI follows the MSCI Italy 25/50 Index and holds 24 stocks. Stocks in the Eurozone's third-largest economy are among the the least expensive in Europe though Italy is a volatile market relative to peers such as Germany and France. EWI has a three-year standard deviation of 19.1%.

“The election occurs against a backdrop of an improving Italian economy and strong equity performance over the last 12 months,” said BlackRock. “The fact that Italian fundamentals appear to be on an improving trend limits the material downside to risk assets from political developments.”

Financial services stocks account for almost 36% of EWI's weight, by far the ETF's largest sector allocation. Energy and utilities names combine for about 31% of the fund's weight. EWI has a trailing 12-month dividend yield of about 2%.

“Our base case, albeit with low conviction, is that a hung Parliament would most likely lead to a grand coalition between PD/Forward Italy and other centrist parties, while the possibility of a new election exists but is unprecedented during the Second Republic,” adds BlackRock. “Other scenarios, such as a national unity government supported by all parties, or an anti-establishment alliance with Five Star and the Northern League or PD, are less likely, in our view.”

For more information on Italy, visit our Italy category.