Spain's colorful history has made it popular with many tourists, from the Running of the Pulls in Pamplona to its unique architecture, but its troubled recent history has made many investors wary of committing any capital in the region. Fortunately, structural reforms and some economic strength has helped improve growth in 2013, making it again attractive. In this article, we'll take a look at how investors can best gain exposure to Spain's resurging economy.
Spain has the 13th largest economy in the world by nominal gross domestic product ("GDP"), even after its steep economic decline during the European sovereign debt crisis. With infrastructure ahead of countries like Japan or the U.S., the country's economy is driven by the second largest tourism industry in the world, its status as a leading automotive manufacturer, and strong investments in multinational renewable energy and technology firms.
Despite its economic decline during the crisis, the country has a relatively competitive economy with a trade balance in surplus with the eurozone, strong export performance, and declining labor costs that are boosting productivity. The country's private sector has also been deleveraging at a fast pace with public finances showing signs of stabilization. And, the potential growth over the coming years remains strong with its structural reforms in place.
Investing in Spain with ETFs
Exchange-traded funds ("ETFs") provide U.S. investors with an easy way to build exposure to Spain's economy into their portfolios. By holding a diverse mix of Spanish equities, these funds provide diversified exposure at a relatively low cost compared to mutual funds. The most popular Spanish ETF is the iShares MSCI Spain Capped ETF (NYSE: EWP), which had about $556.6 million in total net assets and a 0.5% expense ratio, as of September 2013.
Investors interested in buying EWP should be aware of several risks, including its 44% exposure to the financial industry and its 20% exposure to Banco Santander. These figures suggest that the ETF may overexposed to the financial sector and the country's largest bank, which means that it may not offer quite the level of diversification as other country ETFs. Another company accounting for a large portion of the portfolio is Telefonica with its 13% share of the total.
Banco Santander & Other Spanish ADRs
American Depository Receipts ("ADRs") provide an easy way for U.S. investors to purchase an interest in certain Spanish equities. By acquiring blocks of foreign stock, U.S. banking institutions reissue ADRs on U.S. stock exchanges like the NYSE or NASDAQ. The most popular Spanish ADR is Banco Santander SA (NYSE: SAN), which has a market capitalization of $84.9 billion and annual revenues from interest income of around $55 billion, as of September 2013.
Other popular Spanish ADRs include:
- Telefonica SA (NYSE: TEF)
- Banco Bilbao Vizcaya Argentaria SA (NYSE: BBVA)
- Iberdrola SA (OTC Markets: IBDRY)
Risks & Other Considerations
Investors should carefully consider a number of key risks associated with investing in Spanish ETFs or ADRs. With its close economic ties to the eurozone, the country tends to follow the same trends as other countries in the region. For example, troubles in Greece's banking system led investors to question Spanish bank solvency, despite their conservative structure. The country may also be forced to contribute to eurozone bailouts and other measures.
In the end, investors should seek the advice of a qualified financial advisor or accountant before making any investment decisions.