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Which Europe ETFs Can Gain from Russian Tensions?

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Norway, an often overlooked European investment destination, is known for crude oil production. Despite being the world’s fifth largest oil producer and second major natural gas exporter after Russia, the country is yet to get strong footing on overall growth.

Nonetheless, Norway has recently drawn enough investor attention thanks to the long-stretched, gnawing geo-political tension between Russia and the West on the Ukraine issue.

Europe is highly energy-dependent on Russia, from where it imports about 40% of its energy requirements. This dependency has made it difficult for Europe to go against Russia completely.

European leaders are diligently planning to increase their energy supplies from other nations, and Norway is a possible solution as a long-term source of oil and gas supplies with which the continent shares an affable relation (read: 3 Energy ETFs to Buy on the Ukraine Crisis).

Even if the Russia-factor is ruled out, Norway is poised to benefit from higher natural gas demand from Europe if the continent seeks to attain its ‘decarbonization’ target of 85–90% by 2050, as per Statoil natural gas senior vice president.  The target would involve lower usage of coal and higher usage of natural gas (Read: 3 Incredible ETF Buys Under $20).

Norway Economics

Beyond geopolitical issues, as per Bloomberg, Norway’s central bank has maintained its benchmark interest rate at 1.5%, with no plan to raise the key rate until the “summer” of 2015. The nation has manageable public debt to GDP ratio (29.5% in 2013) which is an impressive number in the European bloc.  The country does have some issues like huge consumer debt and a sagging housing market, but any spike in the oil sector will likely give the nation a much-needed boost.

Also, investors should note that since two-thirds of this export-oriented country’s goods go to Europe, its economy will profit from Euro zone recovery.  The economy expanded 2% in 2013 after growing 3.4% in 2012, per the Bloomberg data.  

The central bank slashed its growth forecast for this year to 1.75% from 2% predicted in December. However, even after the downward revision, this energy-rich nation boasts a better growth rate than many of its European cousins (read: Hot Euro Zone ETFs for Summer).

Given the still-strong potential, a look at the top-ranked Norway ETF could be a good idea, especially based on our Zacks ETF Ranking system.

About the Zacks ETF Rank

This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.

The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk (see more in the Zacks ETF Rank Guide).

For investors seeking to apply this methodology to their portfolio in the Norway market, we have taken a closer look below at the top-ranked NORW, which currently has a Zacks ETF Rank of 2 (Buy) with a moderate risk outlook:

Global X FTSE Norway 30 ETF (NORW)

This fund seeks to match the price and yield of the FTSE Norway 30 Index. Holding 31 stocks in its basket, the fund is still somewhat concentrated from both a sector and an individual security perspective (see: all European Equities ETFs here).

Energy comprises roughly half of the total assets while financial companies make up one-fifth of the total. Beyond this, materials, telecoms and consumer staples round out the rest of the top five, making up a combined 25%.

From an individual holdings perspective, the product puts about 73% of assets in top 10 holdings. Statoil ASA accounts for as much as 20.94% share in the fund followed by DNB NOR ASA (11.34%) and Telenor (8.65%).
While the ETF focuses on large caps that account for 84% share, mid cap takes the remaining portion in the basket. The fund has a value tilt with 55% focus trailed by blend stocks with 35% exposure.

The product has so far managed assets of over $98.1 million. However, the fund is light on volume, suggesting that bid/ask spreads are relatively wide and that total costs will come in higher than the 50 bps expense ratio. Further, it is less volatile as indicated by its annualized standard deviation of 18.46%. NORW delivered a modest return of more than 5.0% this year.

Bottom Line

Thanks to its oil funds, some fundamental tailwinds in the energy sector and still-decent growth rate in debt-laden Europe, this top-ranked ETF could still be a great pick for many investors in the days ahead. There is a high chance that Russian worries would brighten the appeal for Norway’s energy exports.  

However, investors should also take note of currency fluctuations as the ETF is an un-hedged one. With the Norwegian central bank’s strategy to maintain the easy monetary policy for long, the nation’s currency will likely remain devalued against the U.S. dollar and eat up a portion of investors’ profits, though the potential for NORW and the country’s economy is still very strong overall.

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