By DAISY MAXEY
Greece's bleeding finances can stain the portfolios of investors in some exchange-traded funds, particularly those with significant holdings in European bank stocks.
The Greek parliament's approval Wednesday of new austerity measures eased the crisis, which had threatened many European countries that hold Greek debt and had troubled markets globally. The five-year plan for spending cuts and tax was required to win approval by the European Union and the International Monetary Fund of a loan installment. But the immediate fix leaves many long-term problems unresolved.
A handful of ETFs have exposure to Greece's financial problems through their European bank holdings, said Kenneth Leon, an ETF analyst with Standard & Poor's Equity Research. He identified four of them: iShares MSCI EAFE Index Fund (EFA),
"U.S. banks have much less exposure to European debt, and banks represent a much larger piece of the stock market in Europe than in the U.S.," says Alec Young, an international equity strategist at Standard & Poor's Equity Research. Banks in Germany, France and the U.K., where an important portion of Greek debt resides, represent 22% of the total European stock market, he says.
The $41.4 billion iShares MSCI EAFE Index Fund has nearly 22.7% of its assets invested in financials, and 7.1% invested in diversified banks.
The $1.4 billion iShares S&P Europe 350 Index Fund and the $928.3 million iShares MSCI EMU Index Fund each have nearly 22% of their assets invested in the financial sector and 11% and 12% invested in diversified banks, respectively, according to the S&P. The $3.7 billion Vanguard MSCI Europe ETF has about 21.3% invested in the financial sector and 11.4% in diversified banks, S&P says.
A spokeswoman for iShares noted that iShares MSCI EAFE Index Fund is a very large, diversified fund, which seeks to track an index representing developed markets in Europe, Australasia and the Far East. The fund has no direct investments in Greece, she said.
Patricia Oey, an ETF analyst at Morningstar Inc., said that as a broad, international fund, iShares MSCI EAFE Index Fund likely has less exposure to Greece's issues. "The others are more concentrated in Europe so would have a more concentrated exposure," she said.
The Vanguard Group says the Vanguard MSCI Europe ETF had only 0.3% of its assets in Greek stocks at the end of May. "That's one of the great benefits of a broadly diversified fund," a Vanguard spokeswoman says. "You have limited exposure to any given country."
While Wednesday's parliamentary action could produce a relief rally in European banks, the issues Greece faces will very likely remain a long-term problem, Young at Standard & Poor's Equity Research says.
"Being diversified isn't a good thing when 20% is in an area that's seen as very uncertain," he said. "The financials are a disaster in Europe."
Long-term investors should take "a surgical approach" to investing in Europe now, Young says. He recommends investing in nonfinancial companies with steady or rising dividends that do most of their business outside of Europe. He favors consumer staples, like beer, alcohol and tobacco; and health care.
Deborah Fuhr, global head of ETF research at BlackRock Inc. (BLK), says investors in the region are being more selective now, and money is flowing especially into Germany's DAX, a blue-chip stock index. In addition to Greece, she notes, investors have concerns about Germany, Ireland, Italy, Spain and Portugal.
Oey says it's not only banks, but insurance companies that may be holding Greek debt.
Another fund with exposure to Greece's woes is the $11.1 million Guggenheim Funds' shipping industry ETF, Guggenheim Shipping (SEA), Oey says. The fund has 13.2% of its assets invested in Greek shipping stocks as of March 31. While Greece's market is down about 15% so far this year, the fund is off about 20% year-to-date, she says.
David Botset, senior vice president of product development at Guggenheim Funds, said "the performance of the Greek shipping companies has been more closely tied to what is occurring broadly within the shipping industry rather than the economic issues facing Greece."
Daisy Maxey is a Getting Personal columnist who writes about personal finance. She covers topics including advisory firms, annuities, closed-end funds and new trends in mutual funds. She can be reached at 212-416-2237 or at firstname.lastname@example.org
--Alkman Granitsas contributed to this article.