Deutsche Bank’s shares (DBK:GR) are tanking over renewed worries about the bank’s financial stability and whether it will need to seek help from Berlin, rumors of which the bank denies. Shares are down more than 50% year-to-date, including a decline of about 7% on Monday.
Thankfully, the fallout for ETF investors has been limited so far, because of the relatively limited exposure held by ETFs. The fund with the largest exposure to Deutsche Bank is the Recon Capital DAX Germany fund (DAX) at just 1.8%. More widely owned funds like the iShares MSCI Germany fund (EWG) have even less, at about 1.6%.
Meanwhile, funds that hold the bank’s ADRs (NYSE:DB) have even less exposure, all under 1%. For a complete list of ETFs with exposure to Deutsche Bank or any other stock, use our Hedge Finder tool.
That’s not to say investors need not worry. The primary risk is contagion to the broader European financial sector, which of course already has to deal with Brexit uncertainty. The iShares MSCI Europe Financial Sector ETF (EUFN) is down about 4% over the past four trading sessions. On valuations, EUFN now looks like a bargain at a 30% discount to book value (FIGURE 1). If the current nervousness subsides and shares return to a more reasonable valuation of, say, 1.0x book value, like they did after the last panic in late 2011 and early 2012, traders would enjoy a healthy profit on the trade.
FIGURE 1: EUFN Historical Price-to-Book Value Multiple
However, one lesson from the Global Financial Crisis is that a bank’s book value is reliable until all of a sudden it isn’t, and thus perhaps a bit of a discount is deserved. More conservative investors who want to avoid the sector altogether might consider the WisdomTree International Dividend Ex-Financials (DOO) fund. It sports reasonable valuation multiples and a 4.6% yield on consensus dividend per share forecasts for the next twelve months.
Do you think Deutsche Bank’s woes will spread to the broader financial sector in Europe? How do you plan to avoid the fallout?