Editor’s Note: My wife and I are in Italy this week. I’ve never been here before and am excited to finally see the art, architecture, and countryside that the country is famous for.

Italy is also famous for its fashion, which is why my wife took me clothes shopping last week. According to her, my usual ensemble of shorts, tee shirt, and ballcap won’t cut it in the glitzy streets of Milan.

I will admit, my wardrobe could use an update. A few days ago, Facebook served up a “memory” from ten years ago and I was wearing the same shirt then that I am now. How Imbarazzante!

The Tip of the Boot

Something else Italy is known for is its perpetually anemic economy. During the past two years, its quarterly GDP growth rate has been no higher than 0.4 percent.

However, that does not mean that you cannot make money investing in Italian companies. Over the past five years, the iShares MSCI Italy ETF (NYSE: EWI) has more than doubled in share price as shown in the chart below.

That discrepancy in growth rates is explained by the way in which this fund is managed. Its stated investment objective is to track the performance of the MSCI Italy Index, which consists of only 26 large and mid-cap stocks.

The fund’s top holdings include commercial bank UniCredit (UCG.MII), financial services provider Intesa Sanpaolo (ISP.MI), and electric utility holding company Enel (ENEL.MI). Those three stocks account for approximately 42 percent of the fund’s total assets.

Winning the Race

You may have never heard of the fund’s top three holdings unless you’ve lived in Italy, but you are probably familiar with its fourth largest position in automaker Ferrari (NYSE: RACE). Since bottoming out below $170 three years ago, RACE has sped up the charts to crest above $500 in February.

Surprisingly, RACE has not backtracked much due to the confusion surrounding the “liberation day” reciprocal tariffs that apply specifically to foreign made cars and parts. I guess if someone has enough money to buy a Ferrari, then an extra 25 percent added to sales price isn’t going to matter much.

But for price-conscious consumers, the reciprocal tariffs could steer them away from the luxury brands for which Italy is famous. And since Italy is a member of the European Union, its economic fate rides on the outcome of negotiations that have gotten off to a slow start.

The United States is Italy’s second-largest export market at a little over 10 percent of total exports in 2023. That’s not an insignificant number, but it is not large enough to represent an existential threat to Italy’s economic prosperity.

Less Amore

What is an existential threat to Italy’s economic prosperity is its aging population and declining birth rate. Over the past sixty years, the median age of Italy’s population has risen from 31 to 48. At the same time, Italy’s total fertility rate has fallen from 2.6 births per woman to 1.2.

Those numbers don’t bode well for an economy. Especially one that thrives on consumer spending, which relies on a large and robust middle-class population in its prime spending years.

For that reason alone, I am reluctant to endorse investing in Italy. It does make some of the best luxury goods in the world, but its population does not have the income to afford them.

What that all means is that Italy is increasingly dependent on tourism and exports for its economy to expand. And with the global trade market currently under pressure, that may be difficult for the country to pull off.