The pain in Spain for the last few weeks and the pain in Europe for the last year have worn down investors who have witnessed near disaster and catastrophe in Greece, Italy, and now the Eurozone’s 5th largest economy, Spain. Spain has certainly felt the pain lately, and any default or Spanish collapse would almost surely lead to complete destruction of the Euro and global economy. With almost everything at stake, investors have very few options to reap benefits from this situation, unless of course you factor in trading with inverse Exchange Traded Funds.
ETFs give investors enormous flexibility in scary financial situations because of their abilities to short specific markets within a brokerage account. Furthermore, ETFs give investors the flexibility to rapidly change his or her ETF trades to adjust to the very fluid European situation, particularly if Europe turns really ugly. So, how does an investor turn Spain and Europe pain into solid gain?
To give a re-cap of the Spain mess and Europe at large: last week, several Spanish bond auctions occurred, in which bond yields hovered around 5.743%, a few points lower than the psychological “7%” danger zone. A report also indicated that the rate of Spanish non-performing bonds increased from 7.91% in February to 8.16% in March, a significant increase from the previous month and previous years’ rates. Furthermore, Spain’s IBEX 35 Stock Exchange broke an additional psychological barrier, the “7000” mark last Thursday, by closing in the red at 6,967 points, further exacerbating the situation and further illustrating the fact that investors are indeed losing confidence in the country and the Eurozone at large.
If all of this was not enough to contend with, France is in hot water, too, as the country lost its “AAA” credit rating by Standard & Poors earlier in the year, in addition to the worry that the Socialists’ candidate, Francios Hollande, who has been labeled “anti-finance” and anti-Euro, will win in the upcoming French elections and possibly de-rail any European Union progress. With France selling bonds last week at an average of 3.09% last week, it is clear that investors do have more faith in France, albeit worries that France and Germany alone cannot save the likes of Spain, Italy, Greece, Portugal, or Ireland.
So, after all of the doomsday rhetoric, where do we ETF investors stand? Two specific ETFs can help investors not only shield their portfolios from a European attack, but also can make money in the event of a European meltdown. Thus, the pain in Spain and Europe can be met with gain in your 401(k).
The first ETF investors could use to profit from a European meltdown would be the ProShares UltraShort Euro ETF (NSYEARCA:EUO), an ETF designed to short the US dollar price of the Euro. So, if the Euro dollar is crashing, the US dollar would likely rise to the occasion and thus investors could strike profit on a crashing Euro situation. Since a pain in Spain would likely lead to a crash in the Euro dollar, NYSEARCA:EUO could be a good bet:
Chart courtesy of stockcharts.com
The 2nd ETF which could insulate investors from a European dilemma would be another short Euro ETF, the Market Vectors Double Short Euro ETN (NYSEARCA:DRR). By looking at the chart below, it is easy to see that NYSEARCA:DRR has performed similarly to NYSEARCA:EUO, and thus this ETF offers another option to short a potentially long, drawn out, European mess:
Chart courtesy of stockcharts.com
Bottom Line: The European situation is scary to say the least, and it just keeps getting scarier as Spain, Italy, and France continue to heat up and cause tremors in the financial system. Fortunately, ETFs give investors a chance to play the European game and seek profits even if Europe’s problems continue by way of short Europe Exchange Traded Funds such as NYSEARCA:EUO and NYSEARCA:DRR. In other words, it is possible to turn Spain’s and Europe’s pain in to a portfolio gain.
Disclaimer: Wall Street Sector Selector trades a wide variety of ETFs and positions can change at any time.