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What Lies Ahead for German ETFs?

Germany is the first among the world’s biggest developed countries to publish full-year growth figures for 2018. Per the Federal Statistics Office of Germany, economic output grew at 1.5% in 2018 — slowest in five years. Domestic demand was the main source of growth seen in 2018.

With global market sentiment showing volatility, policy makers from around the world would be taking cues from the world’s third largest exporter’s data. A weaker global economy, sales problems in the car industry due to new pollution standards and special effects such as an outbreak of flu, low water levels hampering shipping and strikes were the likely reasons behind the slowdown in 2018.

The economy had started to show signs of slowdown in the second half of last year. GDP numbers released in November showed that the economy shrank in the third quarter by 0.2%. This was the first time that the German economy had contracted, since the first quarter of 2015. Declining exports and mixed signals from domestic demand were seen as the possible reasons behind the shrinkage (read: German ETFs in Focus as Economy Shows Signs of Cooling).

Germany, being the largest economy in the Euro zone, is seen as representative of the broad market forces percolating the euro region. Per the European Commission, weak German industrial data added to the block’s woes, as the economic sentiment indicator fell to 107.3 in December from 109.5 in October, dropping in each month of 2018.

Declining Industrial Output

Recently published industrial numbers pointed at a possible contraction in the fourth quarter of 2018.  In November 2018, German industrial output suffered its biggest decline in more than two years. Production was down 1.9% in comparison to October — marking a third consecutive month of decline.

Favorable Signs Going Ahead

Per, Claus Michelsen, an economist at research institute DIW in Berlin, good news coming from the domestic economy should boost consumption and cushion against the weakness in exports.

In December 2018, Germany’s labor market showed promising signs as jobless claims fell more than expected. The adjusted jobless rate stayed at the 5% level — the lowest rate since the beginning of the data series in January 1992. In 2018, negotiated wages rose at the fastest pace since 2014. Such a strong labor market will lead to sizeable consumer demand.

Also, orders for cars and motor vehicle parts have started to gain momentum after a slump in summer. Further, rising water levels in the country’s longest river, Rhine, have helped shipping activities to recover.

The German government is also stepping in with stimulus measures. After allowing for significant budget surpluses in the last five years, Chancellor Angela Merkel’s coalition is planning to invest a record 151.6 billion euros ($174 billion) through 2022 in the field of roads, railways and Internet.

The development in trade talks is also keeping investors bullish toward the German economy. The two biggest economies of the world held a vice-ministerial level trade talks in Beijing during Jan 7-9.

Though, the full information for the just concluded fourth quarter is not available, Tanja Mucha, who helps compile GDP figures at the statistics office, expects a slight increase in gross domestic product for the last quarter of 2018. So, the economy has most likely avoided a recession on a marginal basis.

German ETFs in Focus

Recent positive developments have shown in the rise of German ETFs with iShares MSCI Germany ETF EWG, iShares Currency Hedged MSCI Germany ETF HEWG, First Trust Germany AlphaDEX Fund FGM and WisdomTree Germany Hedged Equity Fund DXGE returning 2.8%, 2.0%, 5.0% and 2.4%, respectively, over the past four weeks (as of Jan 14). Below we highlight them in detail:

EWG

The fund tracks the MSCI Germany Index targeting large and mid-sized companies. It comprises 65 holdings. The fund’s AUM is $2.3 billion and expense ratio is 0.47%. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: ECB Ends QE: 5 ETF Areas Likely to Gain).

HEWG

The fund tracks the MSCI Germany 100% Hedged to USD Index. It seeks to mitigate the fluctuations between the euro and U.S. dollar value. The fund’s AUM is $214.4 million and expense ratio is 0.53%. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

FGM

The fund tracks the NASDAQ AlphaDEX Germany Index. It comprises 41 holdings, and has AUM worth $137.3 million and an expense ratio of 0.8%. It has a Zacks ETF Rank #3 with a Medium risk outlook (see: all the European Equity ETFs here).

DXGE

The fund tracks the WisdomTree Germany Hedged Equity Index. It comprises 84 holdings and has AUM worth $52 million and an expense ratio of 0.48%. It has a Zacks ETF Rank #3 with a Medium risk outlook.

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iShares MSCI Germany ETF (EWG): ETF Research Reports
 
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