Test The Eurozone Recovery With This ETF

The eurozone economic recovery is ongoing. That is a statement some investors may be tired of hearing because they've been hearing it for four or five years now, but data indicate even peripheral eurozone economies are farming though lingering pockets of concern.

Although the euro is stronger against the dollar this year, the common currency is well off historic highs. The retreat experienced by the euro over the past couple of years is helping eurozone blue-chips deliver impressive earnings growth, which is being driven in part by the weaker currency.

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HEZU And EZU

Diverging developed central bank monetary policies, assuming that theme resumes, are also seen as helpful to exchange-traded funds such as the iShares Currency Hedged MSCI Eurozone ETF (iShares Trust (NYSE:HEZU). Some investors are still betting the Fed will raise interest rates in the coming months, perhaps as soon as next month. Conversely, the Bank of Japan and the European Central Bank are seen as having the room to add to their alreadymassive easing programs.

HEZU is the currency hedge answer to the iShares MSCI EMU Index (ETF)

The periphery and the core in Europe are finally starting to converge. Italy is a bright spot. Reforms to jumpstart the economy, such as a more flexible labor market, are showing early results. An October referendum on the governments reform agenda will be critical, said BlackRock in a recent note.

Italy And Germany In The Spotlight

The iShares MSCI Italy Index (ETF) (NYSE:EWI) is slumping this year, as investors assess the health of Italy's major banks. The point is particularly relevant when discussing EWI, the largest Italy ETF trading in New York, because EWI allocates 32.6 percent of its weight to the financial services. That is about 1,200 basis points more than is devoted to the ETF's second-largest sector allocation, utilities.

Italy is the fifth-largest geographic allocation in HEZU at a weight of 6.8 percent. France and Germany, the eurozone's two largest economies, combine for nearly 62 percent of the ETF's weight.

Italys banks look vulnerable due to a mountain of crisis-era bad debts. A new bailout fund and rules that aim to strengthen creditors may help nurse the sector back to health, but we expect slow progress. This leaves the financial system and economy vulnerable, said BlackRock.

The iShares MSCI Germany Index Fund (ETF)(NYSE:EWG), which is off 3.3 percent this year, could use the benefit of a weaker euro, because the fund devotes more than 20 percent of its weight to consumer discretionary stocks, its largest sector allocation.