Slowing German Economy Could Plague These ETFs, S&P Says

The German economy, the Eurozone's largest and the beacon of light in the troubled region, is showing signs of slowing as the ills of its neighbors are finally weighing on an export-driven Germany. The European Commission is forecasting German GDP growth of just 0.8 percent this year and the same rate next year.

That is less than half the previous forecast of 1.7 percent growth and it could be enough to plague some ETFs with heavy exposure to Germany, according to S&P Capital IQ.

"When coupled with the notable recent weakening in a broad swath of German economic data, we believe this news has investors more concerned about Germany's ability to continue to offset peripheral recessions. In addition, more broadly, fears are mounting weaker regional growth may short-circuit the ECB's rescue roadmap, in our view," the research firm said in a note.

Year-to-date, the iShares MSCI Germany Index Fund (NYSE:EWG) has jumped 16.2 percent while the Market Vectors Germany Small-Cap ETF (NYSE:GERJ) has rallied 24.5 percent. The past month of trading tells a different story as both are in the red.

Due to lingering global macroeconomic uncertainties, S&P Capital IQ sees choppy performances through year-end for Europe and emerging markets ETFs. S&P Capital IQ currently has Overweight ratings on the iShares MSCI EAFE Index Fund (NYSE:EFA) and the Vanguard equivalent, the Vanguard MSCI EAFE ETF (NYSE:VEA). The two are massive ETFs as VEA had $11 billion in assets under management at the end of September, according to Vanguard data.

EFA had $36.7 billion in AUM as of November, according to iShares. That ETF features a weight of 8.4 percent to Germany, making the country the sixth-largest nation weight in EFA.

"The status quo' U.S. election results have investors worried a timely deal to overcome most of the fiscal cliff will be difficult to reach, potentially negatively impacting 2013 GDP growth in the world's biggest economy and export market" S&P said in the note. "This is also weighing on international equities, we believe, although reasonable valuations and attractive dividend yields in both developed and emerging international markets should lessen downside risk somewhat, in our view. What's needed here is a signal from the White Housethat it is willing to compromise with Republicans in the Congress. We think that would calm nerves on this issue."

Regarding yield and valuation, EWG's 30-day SEC yield of 2.86 percent is superior to that of 1.96 percent offered by the SPDR S&P 500 (NYSE:SPY), but those extra basis points come with a higher valuation. EWG's price-to-earnings ratio is 18.56 compared to 13.32 for SPY.

For its part, EFA is attractive on a yield basis with a 30-day SEC yield of almost 4.6 percent. That fund has a P/E ratio of almost 17 and a price-to-book ratio of 2.41, according to iShares data.

Investors looking to hedge positions in EFA or VEA or profit from the declines of those funds should consider the ProShares Short MSCI EAFE (NYSE:EFZ). EFZ is the unleveraged inverse equivalent of EFA. For example, if EFA falls one percent on a given trading day, EFZ should rise by a comparable amount.

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