2 ETFs to Watch Amid 'Frexit' Hype

Elections in France and other European nations have fueled call options trading on the Guggenheim CurrencyShares Euro Trust (FXE) and the SPDR Euro Stoxx 50 ETF (FEZ)

Mar 1, 2017 at 9:28 AM
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Last year's Brexit vote came as a shock to the world, as well as financial markets, with stocks temporarily tanking in the aftermath. Now, there's growing speculation that a "Frexit" -- a French exit from the eurozone -- could be in store after the spring presidential election, should Marine Le Pen succeed Francois Hollande. What's more, there's talk that the Netherlands could also abandon the currency bloc, should the nationalist party take power in March. Against this backdrop, two eurozone-focused exchange-traded funds (ETFs) are catching major heat from options traders: the Guggenheim CurrencyShares Euro Trust (FXE) and the SPDR Euro Stoxx 50 ETF (FEZ)

FXE Calls Red-Hot as ETF Stares Up at Former Support

FXE is designed to track the price of the euro, with one of the listed benefits to "balance a portfolio or protect against currency swings." In November, following the election of U.S. President Donald Trump, FXE gapped lower, and ultimately breached support in the $103-$104 area, which had contained pullbacks in 2015. FXE ultimately hit a record low of $100.46 on Jan. 3, and is now trading just a hair above its year-to-date breakeven level, last seen at $102.78.

FXE chart Feb 28

Prior to the Brexit vote, FXE put options were in vogue, as you can see in the chart below. This time around, it's FXE call options that are red-hot. In fact, call volume hit an annual high last Wednesday, Feb. 22, and call open interest is now at its highest point since late 2015. The June 107 call has been the most added during the past two weeks, with roughly 27,000 new positions, most of which were bought to open last week. FXE hasn't been north of $107 since before the U.S. election. However, it's worth noting that some of the recent call buying could be related to short sellers seeking a hedge, as it would take nearly six days to buy back all these bearish bets, at FXE's average pace of trading.

FXE open interest chart
Data courtesy of Trade-Alert

However, history is in the ETF's favor. Since inception, FXE has averaged a 1.1% gain for the month of March, and a 1.4% gain in April, according to Schaeffer's Quantitative Analyst Chris Prybal. Still, it'll likely be macroeconomic developments -- not seasonality -- that determine where FXE goes from here.

FEZ Breaks Out, Call Volume Skyrockets

FEZ represents the performance of "some of the largest companies across" the eurozone, and France holds the most weight, at 35.79%, as of Jan. 31. The ETF fell to a three-year low of $28.60 in the immediate Brexit aftermath, but has since recovered nearly 20% to sit at $34.64. Further, FEZ broke north of a channel of lower highs and lows, which started around its 2014 peak. However, the shares are now staring up at the $35 area, which stifled rebound attempts early last year, and represents a 38.2% Fibonacci retracement of FEZ's decline from 2014 to mid-2016. It's also worth noting that $33 represents half the ETF's all-time high and its 12-month moving average, which was resistance for most of 2015 and 2016 on a monthly closing basis. A break below this trendline and $33 could be a signal that eurozone troubles are ahead, according to Schaeffer's Senior V.P. of Research Todd Salamone.

FEZ euro ETF chart

Options volume on FEZ has absolutely skyrocketed in the past month, with call volume hitting a record high yesterday -- quite the opposite of what we saw ahead of the Brexit vote, when put volume surged. In fact, FEZ call open interest now sits at a record high of more than 292,500 contracts outstanding, with the August 37 call the most added during the past two weeks. "Vanilla" buyers of the calls expect FEZ to topple recent resistance in the $35 area by August options expiration. 

FEZ open interest Feb 28
Data courtesy of Trade-Alert

As with FXE, springtime bodes well for FEZ, historically. Since inception, the ETF has averaged a 1.2% gain in March, and a very healthy 3.6% gain in April. Again, though, the fund's trajectory will likely depend on what happens in the broader political stratosphere in the next few months.

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