Unpredictability in the air for Germany ETFs after election

Sep 27th, 2017 | By | Category: Alternatives / Multi-Asset

The results from Germany’s election are in and Angela Merkel’s centre-right coalition remains the largest force in parliament. But with the two largest parties recording their worst result since the 1940s and the far-right Alternative for Germany (AfD) party enjoying considerable support, the political direction of Germany has an added air of unpredictability.

German election results likely to have muted impact on ETFs

Although far from certain, most commentators expect the Bundestag to see a three-party coalition for the first time in Germany’s history.

Merkel must now look to form a majority government from a coalition with the pro-business FDP and the Greens in talks that could last months and, if unsuccessful, could trigger another election.

How has all this affected markets and, in turn, what’s been the impact on ETFs providing targeted exposure to Germany?

Muted or subdued is perhaps the best way to sum it up. The iShares Germany Government Bond UCITS ETF (LON: IDEU) was down 0.12% from Friday’s close to the close of play on Wednesday 27 September, while the iShares Core DAX UCITS ETF (Xetra: DAXEX) was up 0.34% over the same period.

German mid-cap stocks faired a little worse, however, with the db x-trackers Mittelstand & MidCap Germany UCITS ETF (LON: XDGM) falling 1.23% in the days after the election.

The euro has also been subdued, falling just over 1% against the pound in the days since Sunday’s election results.

In the immediate aftermath of the result, Jaisal Pastakia, investment manager at Heartwood Investment Management, said, “Markets are still absorbing the news, but so far the euro is down against the US dollar, German bund yields are little changed and peripheral bond yield spreads are slightly higher. European equities have opened a little lower too. Overall, a slight feeling of disappointment from financial markets this morning.”

Timothy Graf, head of macro strategy EMEA at State Street Global Advisors, the asset manager behind the SPDR ETFs line-up, said: “This election was always going to be most interesting during the coalition-building process, after the ballots were counted. With that in mind, this weekend’s results offer the most intrigue for the coming months.

“In forcing German Chancellor, Angela Merkel to cobble together a coalition with at least two other parties, the potential for headline risk is at its highest. While the actual market impact is likely to be minimal over the medium-term, this weekend’s result does introduce more risk into European political proceedings than previously estimated.”

Andrew Bosomworth, head of portfolio management in Germany for asset manager and ETF issuer PIMCO, thinks the first nationalist party in the Bundestag since the 1950s was not yet a cause for concern for investors.

“Some AfD followers may yearn for the Deutschmark, but the vast majority of Germans see their country’s future in the euro. Modern Germany is not the Weimar Republic. Should periphery spreads widen in the weeks ahead owing to concerns about Germany’s commitment to the European project, we would view that as noise and an opportunity to fade.”

The largest ETF to track the DAX Index is the previously mentioned iShares Core DAX UCITS ETF, which has assets under management (AUM) of €8.7 billion, making it the sixth largest ETF listed in Europe. The fund was launched in December 2000 and comes with a total expense ratio (TER) of 0.16%.

The cheapest ETF to track the DAX Index is the Comstage Dax UCITS ETF (Xetra: CBDAX), which was launched in August 2008 and has AUM of €691 million with a TER of 0.08%.

The db x-trackers Mittelstand & MidCap Germany UCITS ETF gives investors exposure to the 31st to 100th stock listed in Germany when ranked by market-cap. The fund was launched in January 2014 and has in €69m assets with a TER of 0.40%

Investors looking for exposure to German government bonds could try the aforementioned IDEU or the UBS ETF Markit iBOXX € Germany 1-3 UCITS ETF (Xetra: UEFL). The BlackRock fund has AUM of €17m and a TER of 0.20%, while the UBS fund has AUM of €9m and a TER of 0.17%.

Investors could also take a view on the German election result using currency ETFs. ETF Securities offers a range of currency pair ETFs including the ETFS Long Euro Short USD and the ETFS Short Euro Long USD. The funds have AUM of $12m and $22m respectively, and both have management expense ratios of 0.39%.

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