Fractured France

Published on Tuesday, 24 April 2012 23:44 Written by Todd Shriber

Considering that it’s the second-largest Euro Zone economy and that it was the fifth-largest economy in the world last year, the fact that France only has one ETF to call its own might surprise some. But that’s the case as the iShares MSCI France Index Fund (NYSE: EWQ) is not only the king of the France ETF castle; it’s the castle’s only occupant.

EWQ, which recently celebrated its 16^th birthday, is nothing if not predictable. Home to 73 stocks, a 0.52% expense ratio and $283.8 million in assets under management, the ETF has been plagued by the same woes as every other ETF tracking a developed European country. Public enemy number one for EWQ and the comparable ETFs for the likes of Belgium, Germany, Italy, Spain, etc. is of course Europe’s seemingly never ending sovereign debt crisis.

Just when it looks like things are getting better in Europe, global investors are reminded that is far from the case and that it could take several more years before any real progress is made toward escaping the shadow of what some believe is one of the worst sovereign debt crises in history. First, it was Greece, then Portugal. Bailout speculation has since drifted to Italy and Spain.

In the wake of the melodrama, speculation has soared that France is primed for a credit ratings downgrade. Should that happen, the country’s boring costs would spike amid rising bond yields and a potential downgraded of France’s credit would serve as a stark reminder that no European nation is too large to be tainted by the brush of the debt crisis.

Making matters worse in the near-term for French stocks and, by virtue EWQ, is political uncertainty. It has been said that markets don’t like uncertainty. That is true and it’s especially true that markets disdain political uncertainty, yet that’s exactly what France is serving up these days.

President Nicolas Sarkozy is locked in a tough reelection battle with socialist rival Francois Hollande. Their tussle is heading to a run-off and while investors may not be fussed on the job Sarkozy has done, the risks too EWQ are immense should Hollande win. It’s bad enough that many investors erroneously think France is a socialist country. A Hollande victory would cement that theory and give investors reason to ponder if France would some day end up in the same position as more socialist European nations, such as Greece and Spain.

The bottom line with EWQ is that the ETF is down more than 25% in the past year and with no end in sight to the sovereign debt calamity, there are more reasons to avoid this fund than embrace it.