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2012 has not been a good year so far for many developed economies and especially those in Europe. With the intensifying euro zone debt crisis, a threat of another recession is looming large in the region, despite promises from the ECB to increase buying bonds of trouble members (Read: Five Great Global ETFs for Complete Equity Exposure).
This trend doesn’t look like it’s going away anytime soon either, as a heavy debt burden by many European nations, shocking levels of unemployment, and terrible demographics could keep Europe subdued for quite some time.
For investors seeking to maintain some level of European exposure, these unstable conditions have propelled investors to shift towards the relatively safer nations in the region instead. In this regard, investors could consider broad Nordic region and equities in any of the following nations-- Denmark, Norway, Sweden and Finland—for potentially less risky exposure in the broader European area.
These four, although having some key differences, are pretty similar economies. Each uses a heavy handed government approach in order to help manage their relatively small economic footprints.
While this high tax approach is an anathema to many American investors, it has worked quite well for many in this region. In fact, all four rank very favorable on competitiveness surveys, quality of life metrics, and average per capita GDP despite near confiscatory tax rates and intense regulation.
So while these choices may not be the most ideologically friendly to many Americans, they could provide a nice mix of stability and growth in Europe while avoiding the worst of Europe’s woes. Furthermore, should the economies in the broad EU continue to struggle, the relatively strong balance sheets and government spending in these four nations could help these nations to hold up better than most (read: Beyond Germany: Three European ETFs Tracking Strong Countries).
For investors seeking to make a play on these economies, there are just a handful of stocks to choose from. However, there are a couple ETFs in the space, each of which we have highlighted below along with a brief country explanation for investors considering a greater level of exposure to the Nordic region:
The Danish economy is recovering from the recent financial crisis and is looking to head towards an expansionary period. After growing 1% in 2011, the economy is expected to grow 1.2% in 2012 and then 1.5% in 2013, as per Denmark's central bank. Both private and public sector would generate healthy growth going forward.
The country is expected to have stable employment levels and healthy public finances, which would keep the interest rates down. Also, inflation rate remain at lower levels. Further, Denmark enjoys significant account surplus, foreign-exchange reserves and zero public debt.
The nation is a major exporter of machinery, instruments and food products. Its trading partners are European Union countries (for about 70% of exports) and U.S. (Read: Play Europe with This ETF Pair Trade)
Hence, if the Eurozone crisis becomes more severe, Danish exports will be hampered leading to a possible account deficit. Also, the country lacks international competitiveness compared to some of its robust neighbors, suggesting that the country could lose out to others in the region. .
iShares MSCI Denmark Capped Investable Market Index Fund (EDEN)
For broad exposure to the Danish market, investors should look to EDEN. The fund has recently debuted in the space and has just $2.7 million assets under management (Read: Ten Biggest U.S. Equity Market ETFs). It seeks to match the price and yield performance of the MSCI Denmark IMI 25/50 Index, before fees and expenses. The index uses a capping methodology to limit the weight of any single component to a maximum of 25% of the index.
The product uses a passive approach and holds 35 securities in the basket. Like other iShares funds, this ETF does not offer a huge level of diversification to investors, as it allocates nearly 66% of the assets in the top 10 holdings. Novo Nordisk constitutes the top spot in the basket with the largest share at 24% while the next two spots -- Danske Bank and AP Moeller-Maersk make for a combined 14% share.
From a sector look, the fund is skewed towards the healthcare sector followed by industrials and financials. Since EDEN is a new product, it is not popular and trades in low volume of roughly 7,000 shares per day. The fund provides broad exposure to multi cap Danish stocks. While giant and large companies account for about 47%, mid and small cap take the rest of the portion in the basket.
The fund provides ample flexibility as it could invest in derivative instruments like future contracts, options and swaps. The fund charges an annual fee of 53 bps from investors putting it in line with other ETFs targeting the region (Read: The Five Best ETFs over the Past Five Years).
Norway is one of the healthiest economies in Europe due to its low unemployment rate, interest rates, and inflation (Read: Norway ETFs for Safer European Play). After growing at an annual rate of 2-3% over the last several years, the economy is expected to grow at 2.25% this year, as per the IMF. This is well ahead of the euro zone that could contract by 0.5%.
Strong growth in consumer spending, fiscal stimulus and recovery in the housing markets are contributing to the healthy economic growth. Norway is among the richest countries in the world with large oil reserves, robust fiscal and monetary balance sheet, zero public debt and substantial accumulated wealth.
Since the country is an export-oriented economy and about two-thirds of its exports go to Europe, its economy is sensitive to any downturn in the euro zone. At the same time, Norway’s banks have limited direct exposure to the most vulnerable euro zone countries. Additionally, the Norwegian economy remains vulnerable to domestic issues like an overheated housing market.
Global X FTSE Norway 30 ETF (NORW)
For broad exposure in the Norwegian market, investors should look to NORW. The fund tracks the FTSE Norway 30 Index, which reflects the performance of the broad stock market in Norway. Launched in November 2010, the ETF uses a passive approach and holds 32 securities in the basket.
The product is not widely spread across all sectors and individual securities. It holds around 38% in the top three companies. Statoil, Norway’s largest oil company is the top holding with 19% weight, followed by Telenor with 10% weight and Seadrill with 9% weight. The fund provides larger exposure (about 61%) to giant and large cap companies.
From a sector look, the energy sector constitutes the top spot in the basket with 49% share (Read: Two Energy ETFs Holding Their Ground). The next two top sectors – financials and telecommunications combined make up for 24% of assets.
The fund charges 50 bps in fees annually and has attracted about $44.5 million of assets under management so far in the year. The product trades with volumes of 36,000 shares per day on an average, suggesting modest bid ask spreads.
iShares MSCI Norway Investable Market Index (ENOR)
This new fund debuted in January 2012 and targets the Norwegian market. With AUM of $5 million, the fund seeks to match the price and performance of the MSCI Norway IM 25/50 Index, before fees and expenses. The index uses a capping methodology to limit the weight of any single component to a maximum of 25% of the benchmark.
The product is more diverse as compared to NORW (Read: Three ETFs With Incredible Diversification). It holds 58 securities in its basket with Statoil as the top firm (20.6%) followed by Seadrill (8.7%) and Telenor (8.4%). Like NORW, the fund puts more focus on the energy sector with 50% share. The next two sectors — financials and materials, make up for a combined 21.5% share in the basket.
Giant and large companies accounted for about 51% of the assets, while mid and small cap take the rest of the portion in the basket. The product is illiquid and less popular, and charges fees of 53 bps from investors.
Similar to Denmark and Norway, a low unemployment rate, sound public finances, substantial account surplus, and low interest and inflation rates will drive growth in the Swedish economy. However, the economy is vulnerable to the stressed European economies that account for two-thirds of the country’s exports (Read: Beyond the PIIGS, Three Troubled European ETFs to Watch). In fact, Sweden’s banks have direct exposure to the most vulnerable euro-zone countries. This dependence has somewhat brought stability in the Swedish market as of late.
Recently, the government has tweaked down the economic growth rate for this year to 0.4% from 1.3% forecasted previously. Even, this new growth expectation is better that the euro zone growth rates thanks to monetary reforms as well as robust policy frameworks.
iShares MSCI Sweden Index Fund (EWD)
This ETF is the only fund targeting Swedish market and provides exposure to large caps (Read: Try Value Investing With These Large Cap ETFs). Launched in March 1996, the fund seeks to match the performance of the MSCI Sweden Index, before fees and expenses. It uses a sampling methodology, which provides 36 securities in the basket.
With AUM of $323 million, the fund puts roughly 59% of assets in top 10 companies. The top three holdings are Hennes & Mauritz, Ericsson LM-B and Nordea Bank. The product is heavy on industrials, financials and consumer discretionary.
The ETF offers liquidity to investors since it registers trading volume of 206,000 shares a day (Read: Guide to the 25 Most Liquid ETFs). The fund also yields an impressive dividend of 3.58% per year, greatly easing the 51 basis point expense ratio for investors.
Finland is the only nation on the list that uses the euro as its currency and thus, remains the best choice for investors looking to invest in the Nordic region. The economy is expected to grow 0.8% this year supported by relatively low public debt and favorable current account balance. The nation does a great deal of exports outside the euro zone or Germany, ensuring that the impact of the crisis is not too severe for the nation.
iShares MSCI Finland Capped Investable Market Index Fund (EFNL)
Investors seeking to play the Finnish equity market may go for EFNL. This has debuted in January 2012 with assets of $2.1 million under management (Read: iShares Launches Seven Developed Market ETFs). The fund tracks the MSCI Finland IMI 25/50 Index, which used a capping methodology to limit the weight of any single component to a maximum of 25% of the index.
EFNL is reasonably spread across sectors as industrials take the top spot at 31.1% followed by materials (16.2%) and financials (16.2%). In terms of individual securities, Sampo and Kone dominate with 11.6% and 10.1% of assets, respectively. The top 10 holdings comprise 64.8% of the total fund.
The ETF holds 45 securities in its basket and is tilted towards large and mid-caps with 37% concentration in each, although small and micro caps do account for over 15% of assets (Read: Mid Cap ETF Investing 101). Like its Danish counterpart, the fund provides ample flexibility as it could invest in derivative instruments like future contracts, options and swaps.
Thanks to the newness of the product, volume is light that increases the total cost in the form of bid/ask spread beyond the expense ratio of 0.53%.
For investors seeking broad exposure to all of the aforementioned nations, Global X’s GXF is a great pick. The fund tracks the FTSE Nordic 30 Index, charging investors 50 basis points a year in fees and exposing investors to the 30 largest and most liquid companies the four Nordic nations.
Investors should note that the fund has a heavy concentration in financials, industrials, and health care, while energy and tech round out the top five. Meanwhile, exposure is almost half in Swedish securities, while Finnish companies make up just 10% in assets, suggesting that there are definite biases in terms of national exposure.
Still, the product is the only one on the market today that offers targeted exposure to each of the four Nordic nations. This could make GXF, or any of the other ETFs on this list, solid ways to focus in on a region of Europe that many overlook for investment but that can still have great fundamentals despite the overall crisis in the EU.
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