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A long established fund, with consistent dividend returns. The fund is well off its highs attained before the financial crises of 2008. Italy, as part of the larger EU, offers investors the opportunity to grow with a recovering EU economy. Among the available legions of ETFs there are only two mostly Italian weighted at better than 94% and they are closely related funds. First, is the plain vanilla iShares MSCI Italy Capped ETF (NYSEARCA: EWI ) and the currency hedged version, the iShares Currency Hedged MSCI Italy ETF (NYSEARCA: HEWI ). The currency hedged fund HEWI, as its ticker symbol suggests, is identically the EWI fund with the addition of a U.S. Dollar vs Euro currency hedge. It should be noted that a currency hedge does its best to mitigate fluctuation in currency exchange. Just briefly, when the U.S. Dollar strengthens against the Euro, Euro denominated profits will seem to shrink when translated into U.S. Dollars even if Euro denominated profits remain unchanged. Conversely, when the Dollar weakens vs the Euro, Euro denominated profits will seem to grow, even if Euro denominated profits remain unchanged. A currency hedge is designed to ‘smooth out’ these fluctuations. However, there are costs associated with currency hedge, so an investor would a long term horizon may or may not fully benefit from a currency hedge. Hence, the choice of the hedged [HEWI] or unhedged [EWI] version is left to the discretion of the investor. The benchmark index is Morgan Stanley Capital International [MSCI] Italy 25/50 Index (NYSEARCA: USD ): The MSCI Italy 25/50 Index is designed to measure the performance of the large and mid-cap segments of the Italian market. It applies certain investment limits that are imposed on regulated investment companies, or RICs, under the current U.S. Internal Revenue Code. With 26 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Italy. The fund’s cap refers to U.S. IRS tax code in that: …at the end of each quarter of its tax year no more than 25% of the value of the RIC’s assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the fund should not exceed 50% of the fund’s total assets… Lastly, the MSCI cap methodology is designed to minimize turnover. (click to enlarge) ( Data From MSCI and BlackRock) The three heaviest weighted sectors are a little different. The fund weights the Energy Sector energy about 10.8% more than does the index; Financials about 4.41% lighter than the index and Utilities almost 13% heavier than the index. So the fund leans a little more defensively than does the index. In spite of the difference, the iShares Italy capped fund EWI seems to emulate the MSCI index rather well. iShares EWI vs the MSCI Index 1 Year 3 Year 5 Year 10 Year Inception MSCI Italy 25/50 Index -7.09% 7.97% -0.58% -2.83% 4.07% iShares Italy Capped EWI -7.23% 8.21% -0.59% -2.83% 4.16% (Data From BlackRock) As far as individual holdings, MSCI only list the top ten heaviest weighted holdings. A quick comparison reveals a slight difference from the fund. First, the top ten Index holdings represents 65.42% of the entire index, whereas the top ten holdings of EWI represents 68.74% of the fund’s holdings. As far as individual top ten holdings, the iShares fund carries three identical financials and Telecom Italia (NYSE: TI ) 3.6132% of the fund’s total holdings. On the other hand, the MSCI Index carries a fourth financial, Banca Monte Dei Paschi di Siena ( OTCPK:BMDPY ) 5.25%, of the index. The fund carries the bank also, but it accounts for only 2.096% of the total fund. Top ten comparison of MSCI Index vs iShares EWI Sector MSCI EWI Sector Consumer Discretionary LUXOTTICA GROUP (NYSE: LUX ): 4.66% LUXOTTICA GROUP: 4.58% Consumer Discretionary Consumer Discretionary FIAT CHRYSLER AUTOMOBILES NV (NYSE: FCAU ): 4.00% FIAT CHRYSLER AUTOMOBILES NV: 4.11% Consumer Discretionary Energy ENI (NYSE: ENI ): 11.00% ENI: 11.96% Energy Financials INTESA SANPAOLO ( OTCPK:ISNPY ): 12.13% INTESA SANPAOLO: 13.48% Financials Financials UNICREDIT ( OTC:UNCFY ): 7.57 UNICREDIT: 8.72% Financials Financials BANCA MONTE DEI PASCHI DI SIENA SP: 5.25% ASSICURAZIONI GENERALI: 4.53% Financials Financials ASSICURAZIONI GENERALI ( OTCPK:ARZGY ): 4.48% ATLANTIA: 4.56% Industrials Industrials ATLANTIA ( OTCPK:ATASY ): 4.43% TELECOM ITALIA: 3.61% Telecommunications Utilities ENEL ( OTCPK:ENLAY ): 7.73% ENEL: 8.93% Utilities Utilities SNAM ( OTCPK:SNMRY ): 4.00% SNAM: 4.26% Utilities Represents 65.42% of the Index Represents 68.74% of the Fund (Data from BlackRock and MSCI) It’s worth making note of the difference between those two top holdings. Banca Monte Dei Paschi di Siena provides corporate and consumer banking services, asset management, life insurance, pension funds and investment trust. The bank has a market cap of $5.3876 billion, has a negative EPS at -5.97 and does not pay a dividend. Lastly, the shares are rather volatile with a beta of 1.73 times the market. Telecom Italia’s primary businesses are landline and mobile telephone service, internet and internet protocol TV as well as the office product and IT provider, Olivetti , as a wholly owned subsidiary. Telecom Italia company is the leading company in its sector, with international operations in Brazil and Argentina in addition to domestic operations. Telecom Italia has a market cap of $19.87 billion, a P/E of 25.65 and a beta of 1.43 times the market, however, no dividend yield. (click to enlarge) Lastly, a few words about the Italian economy: Italy seems to have two economies: the northern, industrial economy as well as a lagging southern economy. The difference is notable. The entire economy grew at about 0.3% in 2015-Q1 with full year expectations of about 0.7%. The Eurozone economy, (EU19) as a whole, grew at 0.4% in Q1. The results were similar in Q2, with Italy growing at 0.2%, while the entire EU19 grew at 0.3%. However, according to the Economist , ” A Tale of Two Economies” , North and Central Italy grew at 2%, well ahead of the Eurozone as well as the entire EU, (EU28). To put it perspective: … Of the 943,000 Italians who became unemployed between 2007 and 2014, 70% were southerners… … Italy’s aggregate workforce contracted by 4% over that time; the south’s, by 10.7%… …Employment in the south is lower than in any country in the European Union, at 40%; in the north, it is 64%… In the North, per Capita GDP is about $35,500; in the south about $19,250. Unemployment in the North is 9.5%; in the south 20.7%. Public debt is approximately 133% of GDP. The economic obstacles in the south go beyond direct economic regions, including changing demographics. About 700,000 Italians migrated to the northern part of the country and skilled labor is in short supply in the south. Lastly, the southern region contains the islands Sardinia and Sicily where growth and recovery have been slower. Until recently, both islands have been weighed down by higher utility and transportation costs to and from the mainland. Their economies rely heavily on the Hospitality Industry. However, recent reforms and infrastructure upgrades have had very positive results. To put progressive reforms in perspective, Sicily now ranks as the 8th and Sardinia 13th of the fastest growing of the 20 regions in Italy. Sardinia is currently seeking tax haven status, and is currently free from custom duties; Sicily is developing Etna Valley, attracting electronics firms such as STMicroelectronics (NYSE: STM ) and Numonyx, a wholly owned subsidiary of Micron Technologies (NASDAQ: MU ). Key Facts Summary Net Assets Outstanding Shares Holdings x-cash or derivatives 20 Day Average Volume Expense Ratio (Industry Average 0.44%) Price/ Earnings Price/ Book Beta Annualized Yield iShares EWI Italy 25/50 Capped $1.1504 billion USD 79.5 million 26 494,696 0.48% 22.39 1.10 0.85 3.69% and 2.52% TTM (Data from BlackRock and MSCI) At first glance, an investor might shy away based on the Italian economy and to be sure, there is a risk. However, Italy is a key component state of the larger European Union. In other words, the Italian economy is not entirely left to its own devices and is subject to the rules and regulations governing its membership in the EU. True the EU has had some difficult years, but amazingly, has not only come out intact, but has even added a new member. Right now, Italy’s economy as an EU member will feel the effects of a global economic contraction. However, for those investors with patience, the potential for the Italy economy as a member of a fully recovered EU economy, may prove profitable in the long run. Scalper1 News
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