Sep 29, 2016
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What Deutsche Bank's Downfall Means for Europe-Focused ETFs

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Despite claims to the contrary, German and EU regulators are most certainly concerned about ailing banking giant Deutsche Bank.
How could they not be? Germany’s largest bank has seen its stock fall 50% this year, and its credit-default swaps – used as protection in the event of a debt default – recently traded at six-month highs, according to Bloomberg.
Deutsche Bank’s internal problems were exacerbated recently by a $14 billion fine from U.S. regulators related to its handling of mortgage-backed securities during the financial crisis. Many question whether DB could even afford to pay the fine, assuming it sticks. This has led to liquidity concerns for the bank, and even more share price losses.
The troubled company is held in many U.S.-listed European-focused ETFs, and has certainly limited the returns of many of these funds so far this year. Let’s take a look at the ETFs hit the hardest by Deutsche Bank’s downturn, and how future performance could be affected.
The iShares MSCI Europe..

Despite claims to the contrary, German and EU regulators are most certainly concerned about ailing banking giant Deutsche Bank.

How could they not be? Germany’s largest bank has seen its stock fall 50% this year, and its credit-default swaps – used as protection in the event of a debt default – recently traded at six-month highs, according to Bloomberg.

Deutsche Bank’s internal problems were exacerbated recently by a $14 billion fine from U.S. regulators related to its handling of mortgage-backed securities during the financial crisis. Many question whether DB could even afford to pay the fine, assuming it sticks. This has led to liquidity concerns for the bank, and even more share price losses.

The troubled company is held in many U.S.-listed European-focused ETFs, and has certainly limited the returns of many of these funds so far this year. Let’s take a look at the ETFs hit the hardest by Deutsche Bank’s downturn, and how future performance could be affected.

The iShares MSCI Europe Financials ETF (EUFN) is the first fund that comes to mind when considering Deutsche Bank’s impact. As the only U.S.-listed European financials-focused fund, EUFN “seeks to track the investment results of the MSCI Europe Financials Index, which is a free float-adjusted market capitalization-weighted index designed to measure the combined equity market performance of the financials sector of developed market countries in Europe,” according to fund literature.

The fact that EUFN, like many major funds, is market cap-weighted, is its saving grace in this instance. As Deutsche Bank’s share price (and thereby, market cap) has shrunk, so too has its representation within EUFN. As of September 28, Deutsche Bank represented only 1.182% of EUFN’s holdings, so its potential future impact is relatively small.

However, EUFN has already fallen 15.77% since the start of the year, no doubt hurt by Deutsche’s big decline, since the bank used to represent a much larger portion of the fund's holdings.

The other big ETF to watch here is the iShares MSCI Germany ETF (EWG). EWG has the largest Deutsche Bank exposure of any U.S.-listed fund, at around 1.5%.

That hasn’t hurt its performance too badly this year, however, because EWG has only declined about 1.49% since the start of 2016. The fund has been buoyed by strong performances by German economic stalwarts like SAP, Siemens, and Bayer, which make up its top three holdings.

Other funds with notable DB exposure include Guggenheim Multi-Asset Income ETF (CVY), with 1.04% of its holdings in DB, and BLDRS Europe 100 ADR Index Fund (ADRU) at 0.58%. Those are relatively low percentages, however.

Should things get much worse for Deutsche Bank, there could be some contagion risks in other aspects of European financials and the German markets. There's always the smallish risk that the bank defaults on its debt, or needs a big bailout, which would definitely impact related funds.

But future impacts on U.S.-listed ETFs should be fairly muted moving forward, considering the lack of major direct exposure to the bank.

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