From Zacks: The German GDP growth of 0.4% in the fourth quarter of 2016 fell short of market consensus estimates of 0.5%. However, considering the full year GDP growth, the economy grew by 1.9%, which was the strongest growth rate in nearly half a decade.

The fifth largest economy in the world owes its growth in the fourth quarter of 2016 to a healing job market. About 43.7 million people were employed in the quarter, marking an increase of 0.6% from a year earlier. Increasing domestic demand was a major contributor to the high growth witnessed in this year.

Germany’s Purchasing Managers Index (PMI) is on an increasing trend with German services – 54.4 (expected 53.6), German manufacturing– 57 (expected 56), German composite – 56.1 (expected 54.7) showing confidence in the economy.

With a 1.9% inflation rate year-on-year in January of 2017, the highest inflation rate since July 2013, our focus would be on creating a diversified portfolio on Germany offering exposure to ETFs which can benefit from the current state of the economy.

It should be clear to investors that small cap companies generate most of their revenues from the domestic market. They also grow faster than their large cap counterparts in a fast-growing economy. As a result, small-caps should be at the center stage in Germany.

However, we cannot ignore the diversification potential and the safety net provided by large cap companies with significant business interests internationally.

German business confidence as depicted by the leading indicator Ifo, rose to a better-than-expected 111.0in February. Overall, the bullish take on the German economy makes us look out for the following ETFs (read: 3 Reasons Why These European ETFs Compelling Bets Now):

iShares MSCI Germany ETF(EWG – Free Report)

The fund tracks Germany’s economic performance and is heavy on Consumer cyclical (20%), Basic materials (16%), and Financial Services (14%). With a moderate fee of 48 bps and a high exposure to large cap companies having International presence, the current economic environment would prove to be beneficial to these companies. The fund currently has a
Zacks rank #3 with a medium risk outlook. It has a year to date return of 5.21% and a one year return of 20.51% (as on 22 February, 2017) (read: World ETF (ACWI) Hits New 52-Week High).

iShares MSCI Germany Small-Cap ETF (EWGS – Free Report)

The fund is heavy on Industrial (26%), and Real Estate (14%) companies looking to benefit from the forecasted growth in the German GDP from Industrials and construction, as well as the growing inflation in the economy which benefits real estate investments (read: Small-Cap Europe ETF (EUSC) Hits New 52-Week High).

With a moderate fee of 59 bps, EWGS provides good mid cap and small cap exposure to investors looking to gain from the growing German economy, since these companies are mostly dependent on the domestic market conditions. The fund currently has a Zacks rank #3 with a medium risk outlook. It has a year to date return of 7.60% and a one year return of 17.86% (as on 22 February, 2017)

iShares Currency Hedged MSCI Germany ETF (HEWG – Free Report)

The fund has a moderate fee of 53 bps and is the appropriate bet for investors wanting to avoid the currency risk associated with investing in foreign ETFs but at the same time wanting exposure to German large cap equities having enough International exposure to benefit from the current market scenario. The fund currently has a Zacks rank #3 with a medium risk outlook. The fund has a year to date return of 5.07%, and a one year return of 27.75% (as on 22 February, 2017) (see all European Equity ETFshere).

The iShares MSCI Germany Index Fund ETF (NYSE:EWG) fell $0.07 (-0.25%) in premarket trading Tuesday. Year-to-date, EWG has gained 3.85%, versus a 5.93% rise in the benchmark S&P 500 index during the same period.

EWG currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #5 of 91 ETFs in the European Equities ETFs category.

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This article is brought to you courtesy of Zacks Research.

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