ETF Portfolio Recommendation Assignment

Topics: Exchange-traded fund, European Union, LVMH Pages: 6 (2067 words) Published: March 23, 2014


Exchange-Traded Funds: An Introduction
The iShares definition of ETF is as follows:
“An exchange traded fund (ETF) is an investment vehicle that combines key features of traditional mutual funds and individual stocks. Like index mutual funds, ETFs represent diversified portfolios of securities that track specific indexes. Like stocks, they can be bought and sold (long or short) on an exchange throughout the trading day. In addition to trading flexibility, key ETF benefits include instant diversification, tax efficiency and transparency of cost and holdings.”

The Eurozone:
With the official declaration of the Euro in 1999, the single currency bound several countries in a pact that would see them grow together. However, with the affiliation of some high risk coun tries and ventures with the Euro, borrowing became cheaper. As an example, Greece was paying around 8.5% to borrow before the formation of the EU in 1999. By 2003, however, it was securing funds at 4.3%. As a result, excessive borrowing and leverage ensued, which worked well with increasing growth seen in the region up until 2008. At this time, growth had curtailed, and these countries, that had previously borrowed and leveraged a substantial amount of funding, had to kee p up with the repayments to their debtors. With an allowable limit to borrowing of 60% of GDP, it is evident that none of these nations were in par with the set policy. Without the option of cheap borrowing to sustain growth, which was the norm before 2008, and with amassing obligations to creditors, the only viable option left was to increase output by increasing productivity. This, however, is easier said than done. There exists a stark contrast between the highly productive Northern Europe, which are net exporters, and the less productive Southern Europe, which are net importers. Hence, due to the fact that these countries import more than they export, they had deficits that would require attention. What the future holds: Greece has always been the hot topic of debate within the past few years, and rightly so. With their borrowing standing at 165% of GDP, analysts have predicted their exit from the EU, despite the recent falling of deficits by 73%, from 9.9% of GDP in 2011 to 2.9% of GDP in 2012. This would mean that Greece defaults on its loans, because as the country exits the EU, they will likely be locked out of lending markets. This would mean that they will have to print more of their own currency, the drachma, which would devalue it, and bring about a rise in inflation, perhaps upto 35%. With their less valuable drachma, they would need more in order to pay off the debt they owe in Euros, which is more valuable, and cope with the high inflation within their nation. Hence, the defaults would initiate, with the EU and the European Central Bank taking big blows. These institutions will now have to convince investors of buying their government bonds by ensuring Portugal, Spain, and Italy’s loyalty to the EU. They will probably have to offer higher rates of return in order to attract funding. If, however, they fail in this endeavour, the whole union will collapse, with ripples encompassing the entire globe. In summation, the uncertainty in Europe is rising, as the consequences of Greece’s decision in either direction seem to be negative, pointing towards the solvency of the EU. Consumer Discretionary Sector:

It’s the sector of the economy that includes retailers, apparel companies, jewelries and accessory companies and automobile companies. One can invest in the entire consumer discretionary sector by investing in a Consumer Discretionary Index ETF.

SPDR MCSI Europe Consumer Discretionary Index ETF:
From the European ETF Survey 2013 done by Ernst & Young, we know that retail ETFs are expected to expand from 15% to 25% of all European ETFs assets by 2020. There is a reason for the stress on the consumer discretionary sector in 2013, mainly owing to its stellar...
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