NEW YORK (Reuters) - Europe's financial stocks, facing the kind of financial threat that hit U.S. stocks in 2008, soared this week as Europe's leading economies led a bailout of Greece that appears to be a workable solution.
There is no guarantee that happy days are here again for Europe but the worst-case scenario has been avoided for now. A recovery rally might be expected to continue. The biggest rebounds might come from the hardest hit, some analysts say.
Here are ETFs that might benefit:
BUY ITALY'S ETF
Exchange-traded funds (ETFs) present an opportunity for investors interested in gaining exposure to Europe without taking risks on individual stocks. For those looking to hold an ETF for a six-to-12 month range, a good play would be to buy an uptrending European ETF on a dip.
The iShares MSCI Italy Index Fund is the best bet, said ETF investor Gregory Spear, who sees it as the closest ETF to Greece, given that there is no Greek-specific ETF, with reasonable liquidity. The Italy shares ETF was up nearly 23 percent from the start of the year to its high in late April, before downtrending on European weakness over the past month.
"The situation in Europe is so severe that leaders have to act and we anticipate a positive outcome within the next few weeks," Spear said.
Spear, editor of Spear's ETF Analyst in Hartford, Connecticut, said he made 5.0 percent after buying the iShares Italy ETF last week and selling it on Thursday after news of the deal broke.
"When we bought it, it was one of the worst performers in the market," Spear said. "Because the drop had been so sharp, when knew that European leaders would have to make a move. The market dictated that they would have to do something to quell the trajectory."
ETF investor Dave Fry cautions that the Italy ETF could be a riskier move. "For retail investors who are interested in avoiding risk, they'd probably not want to get involved in Spain or Italy," Fry said. "They should probably gravitate toward IEV (the iShares S&P Europe 350 Index Fund) and EWG (the iShares MSCI Germany Index Fund)."
Fry said he sees the iShares Germany ETF, the most liquid of all European ETFs, as more stable and the S&P Europe 350 ETF as more broad-based.
BUY CURRENCY ETFs
For investors interested in taking advantage of the currency trade, Fry said the Rydex CurrencyShares Euro Trust ETF has potential if it breaks out of the $140 to $145 range, which it oscillated in from early June to early July.
Fry, founder and publisher of ETF Digest, said if the ETF breaks below $140, he would go short, and if it breaks above $145, he would go long. The ETF was last down 0.1 percent on Friday at $143.03.
The details of Europe's plan for Greece, which involves pumping an extra 109 billion euros ($157 billion) into the system, could actually further pressure the euro, presenting a possible downwards trend for the ETF.
"Clearly the Europeans have added a quantitative easing strategy of their own, by printing a lot more euros to bail out Greece and anybody else that comes along," Fry said.
The number of FXE shares being shorted rose by more than a third in June, after jumping almost 28 percent in May, according to data compiled by IndexUniverse. In fact, the number of FXE shares short is 178 percent of the number of outstanding long FXE shares, according to the July 15 IndexUniverse report.
EUROPEAN BOND ETFs
Other potential plays in the ETF arena include those tracking European bonds, such as the SPDR Barclays Capital International Treasury Bond ETF or the SPDR DB International Government Inflation-Protected Bond ETF.
"The case for most global ETFs in the euro zone in May and June was that money was actually flowing out of money market ETFs because there was a real fear that the single currency was about to collapse," said Jose Garcia-Zarate, a Morningstar ETF analyst based in London.
"With the markets actually seeing this agreement as a positive step, we would expect to see some correction on the flows and get some more money into money market ETFs over the next few weeks," he said.
The BWX ETF, while tracking a variety of international bonds, is focused mostly on developed countries and largely in Europe. More than half, 52.2 percent, of the ETF is weighted in Europe, with 10.7 percent in Italy. The ETF rose 2.0 percent from its close on Monday to its high on Friday.
"There's been a lot of interest in those," Fry said. "But BWX has been very weak, not knowing what the credit worthiness was. It underperformed its U.S. counterpart."
Fry said both ETFs could rise.
(Reporting by Ashley Lau)
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