When Will The Spain Pain End?

Published on Thursday, 31 May 2012 22:18 Written by Todd Shriber

Let’s be honest. Spain, the Euro Zone’s fourth-largest economy, is in big trouble. The country’s unemployment rate, the worst in the Euro Zone, is above 20%. Spanish banks need a recapitalization plan and need it now, but the Spanish government is reluctant to move forward with such a plan. The sheer size of the Spanish economy makes any prospects for a bailout murky at best.

And it is that confluence of factors that has triggered a dire performance for the iShares MSCI Spain Index Fund (NYSE: EWP), the only ETF exclusively devoted to the Iberian nation. For a couple of weeks now, EWP has been trading below its March 2009 low. With a close of $21.36 on Thursday, the ETF is residing in a price neighborhood it hasn’t lived in in nine years.

Frankly, no one should want to touch EWP with a 10-foot pole. Just a couple of months ago, EWP’s dividend yield was flirting with 10%, perhaps enticing yield-hungry investors into the fund. That proved to be a yield trap that burned investors because EWP’s yield is now 13.7%. It’s easy to see why the fund has struggled.

Financials are EWP’s largest sector weight with an allocation of 39.6%. Banco Santander (NYSE: STD), the country’s largest bank and EWP’s largest holding at almost 20%, has plunged 16.7% in the past month. EWP also has the misfortune of offering slight exposure to embattled Bankia, the lender that needs $24 billion in bailout assistance. That is $24 billion that no one knows from where it’s going to come.

Let’s put how bad EWP has been into context. The PIIGS acronym is comprised of six countries – Portugal, Ireland, Italy, Greece and Spain. All but Portugal have a U.S.-listed ETF tracking them. If note for the Global X FTSE Greece 20 ETF (NYSE: GREK), which has lost 34%, EWP would be the worst performer of the group in the past month.

EWP’s near-term problem is obvious: It has more to fall and there’s precious little in the way of expected good news to prop this ETF up. With global traders becoming resigned to the fact that Greece is likely on its way out of the Euro Zone, they will turn their attention to hammering Spain and EWP. One ratings agency already has a junk rating on the country and yields on Spanish sovereigns are blowing out to euro-era records as are the costs of ensuring against default with credit default swaps.

EWP is a falling knife with further to fall. Be wary of near-term, oversold pops in this ETF and just say "adios" to this thing.