Thanks to several monetary easing policies, Europe has performed remarkably well this year with a marked recovery in the Eurozone. However, concerns have started to build up in the region following an inconclusive election in Spain. This has raised fears of a prolonged political uncertainty much like Greece and Portugal. Election Results and Outcome Election in Spain ended up with no clear winner. While the ruling Popular Party led by PM Mariano Rajoy won the majority of votes, it fell short of the 176 seats needed for a parliamentary majority. The party acquired only 122 seats out of the 350-seat parliament, suggesting that it has to collaborate with the Socialist party, who won 91 seats, or newcomers Podemos and Ciudadanos, who secured 69 and 40 seats, respectively, to form a coalition government. A political gridlock might be in the cards for weeks or months until a new government is formed. Additionally, it will lead to new obstacles in continued implementation of austerity and reform measures due to a mismatch of opinions and views. This is because Rajoy has pushed for harder budgetary policies and wide-ranging economic reforms like spending cuts and tax increases to avoid the fate of Greece, which had to be bailed out a number of times. But Podemos and the Socialist party, led by Pedro Sanchez, have campaigned against these anti-austerity measures. Though Spain’s economy has grown over the past one year, GDP is still below its pre-crisis level and unemployment over 20%. Moreover, the fourth largest economy in the Eurozone will struggle to form a stable government and might put an end to the historic 33-year two-party dominance. This will weigh on investor and consumer sentiment in the coming months, suggesting a strong negative shift in the outlook towards Spain, so much so the country could be another threat to Eurozone’s growth heading into 2016. Market Impact Following the election last weekend, Spanish stocks, as represented by the IBEX 35 index, declined 3.6% on Monday, marking the biggest one-day drop since late August. Meanwhile, the country’s 10-year bond yield rose 0.11% to 1.79%. This reflects that investors are turning bearish on the country given the fears of political uncertainty. As such, the ultra-popular ETF targeting Spain – the iShares MSCI Spain Capped ETF (NYSEARCA: EWP ) – was the worst performer in the European space on the day losing 3.7% at the close. Another fund -the iShares Currency Hedged MSCI Spain ETF (NYSEARCA: HEWP ) – is also down 3%. EWP in Focus The fund tracks the MSCI Spain 25/50 index and is home to a small basket of 25 stocks. It is heavily concentrated in the top firm – Banco Santander (NYSE: SAN ) – at 15.2% followed by Telefonica (NYSE: TEF ) and Banco Bilbao Vizcaya Argentaria (NYSE: BBVA ) with at least 9% share each. Financials takes the top spot at 40% in terms of sector holdings, followed by 16% exposure each in industrials and utilities. The product has AUM of nearly $1.4 billion and trades in solid volume of 1.4 million shares per day. It charges 48 bps in fees per year from investors. HEWP in Focus This product seeks to provide exposure to the Spanish stock market without the currency risk. It follows the MSCI Spain 25/50 100% Hedged to USD Index and is basically a holding of EWP with currency hedge tacked on. The fund is unpopular and illiquid with AUM of $71.8 million and average daily volume of 19,000 shares. It charges 51 bps in fees per year from investors. Bottom Line Spain ETFs could be a risky investment going into the New Year as political uncertainty might stretch far longer than expected pushing the country into deep trouble. Original Post