Six ETFs For The Plunging Euro

Published on Thursday, 15 December 2011 19:27 Written by ETF Professor

It's not exactly breaking news at this point, but the euro is plunging. Soaring yields on Italian sovereign debt have forced the common currency below $1.30 for the first time since January.

The CurrencyShares Euro Trust (NYSE: FXE) paints an even gloomier picture. This was a $148 ETF in May. Today, it struggles to hold $129. FXE was also almost 8% below its 200-day moving average Wednesday and not yet oversold as measured by its relative strength index.

As we noted earlier this month, Morgan Stanley sees the euro declining to $1.21 next year. Add to that expectations that at least one country will depart from the common currency and it's mainly doom and gloom for the world's second-largest reserve currency.

Of course, there are potential winners from the euro's demise and there are more losers than just the CurrencyShares Euro Trust. Let's have a look at three ETFs that should benefit from a faltering euro and three that will be plagued if the common currency can't turn things around.

Potential Winners:

PowerShares DB Dollar Bullish (NYSE: UUP): Yes, the PowerShares DB Dollar Bullish is an obvious victor with the euro declining, but this ETF is worth a look for other reasons. The Swiss franc being pegged to the euro eliminated one obvious safe haven candidate. A strong yen makes that currency all too vulnerable to intervention by the Bank of Japan. Gold is faltering. That drives the safe haven count down to one and the one is the good old greenback. As it is, UUP is up over 4% in the past three months.

iShares MSCI Sweden Index Fund (NYSE: EWD): Last month, we noted EWD could be the Europe ETF rebound candidate and while that hasn't happened quite yet, it is worth noting Sweden is far stronger economically speaking than almost all of the Euro Zone. A low debt burden, steady if not unspectacular growth, and not being a Euro Zone country all bolster the case for taking a look at this Nordic safe haven. Oh yeah, and Standard & Poor's has RAISED its ratings on Sweden's two biggest banks. Imagine that.

iShares MSCI Germany Index Fund (NYSE: EWG): Easily the riskiest of our three potential winners, the iShares MSCI Germany Index Fund is at the epicenter of the European crisis because Germany is the Euro Zone's largest and strongest economy. The chart for EWG is ugly and shows a drop below $18 probably takes the ETF to $16. Patient investors can warm to the ETF because a declining euro should be good news for this export-driven economy.

Potential Losers

iShares MSCI Turkey Investable Market Index Fund (NYSE: TUR): There is a bull case for Turkey, sort of, but there is probably more of a bear case at the moment. Guilt by geography is plaguing this ETF and if it falls below $40, watch out. The ETF's 36% year-to-date loss could easily become a 50% drop.

iShares MSCI Switzerland Index Fund (NYSE: EWL): Switzerland should be a safe haven. Well, that status has been revoked and the iShares MSCI Switzerland Index Fund is suffering. First problem: The ETF is too heavily allocated to bank stocks. Second problem: Switzerland isn't a Euro Zone member, but that's where the bulk of the country's exports go. If the 52-week low at $20.67 doesn't hold as support, get out or get short.

Market Vectors Poland ETF (NYSE: PLND): Another guilt by geography play, PLND deserves some credit for inching higher today, but the ETF is just 15 cents off its 52-week low at this writing. Poland is probably one of the more, if not the most, reliable investment theme in emerging Europe. The problem is that it's hard to endorse emerging Europe when developed Europe is in crisis mode.

Action Items:

Traders that believe the euro is in for more declines may want to consider the following trades:

• Long UUP Long ProShares UltraShort Euro (NYSE: EUO).
• Long ProShares UltraShort Europe (NYSE: EPV).

Traders that think the euro may rally may want to consider the following trades:

• Long FXE.
• Long Emerging Europe country funds.
• Long the PowerShares DB Dollar Bearish (NYSE: UDN).

Benzinga does not offer investment advice, personalized or otherwise. We recommend that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.