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By David Stevenson –
Talk to the clever investment research and strategy folks at Swiss private bank Lombard Odier about how they use exchange-traded funds (ETFs) and one simple proposition comes across: investing in national market ETFs is a cheap and effective way of buying certain style drifts within the complex and noisy world of equity markets.
Country indices and their accompanying ETFs typically represent a diversified universe of stocks. In the case of the UK, there’s a strong value bias, mixed in with an emerging markets theme.
Swiss ETFs by contrast might capture more of a quality, defensive skew with lots of well-respected business franchises with a global reach and relatively stable earnings (bar its banks).
The German market is heavily biased towards export-orientated companies, many of which make money from a steadily expanding China, whilst South Korea and Taiwan are more generally seen as more palatable ways of buying into the Greater China story (you get the “China Effect” without all the direct state interference and annoying capital controls).
Step back from each of these national idiosyncrasies and one can see how buying that nation’s ETF is an elegant and cost-effective solution to a perennial investment problem – how do I buy the right kind of exposure, at the right price, in liquid, easy to trade underlying assets?
What then are we to make of the db X-trackers MSCI Nordic Index UCITS ETF (DR) (XDN0), a recently launched ETF from the Teutonic folks at Deutsche Asset & Wealth Management (DeAWM) tracking the MSCI Nordic Countries Index? Now, before we look at the ins and outs of this index (and accompanying ETF), I must immediately confess to some important personal Nordic biases – and no, I’m not about to make a cheap joke about the attractiveness of some of the citizens of these countries…
I’ve long banked with one of the most successful Swedish banks, Handelsbanken, which for me seems to sum up what a bank should operate like: it employs real humans, to make real decisions and is very boring in a pleasant way i.e. the epitome of good banking corporate governance and also rather old fashioned in a nice way. I’ve also recently caught myself buying into a number of direct Nordic equities, including fast growing P2P lender Trustbuddy (on the Nasdaq OMX Nordic exchange) and a number of Norwegian oil equipment and services outfits. Last, but by no means least, I’m personally drawn to the dominant Nordic political model, which mixes hard-nosed liberalism with a heavy dash of welfare state social democracy.
So with these personal biases firmly out of the way, let’s peer under the bonnet of this new Nordic flavoured ETF and examine the index up close. Not unsurprisingly, we find a fairly typical quality, mega cap European gaggle of stocks – a kind of defensive, developed world equities index for the more discerning kind of investor. Of the 67 stocks within the index, spread across five different national markets (dominated by Sweden with 51% of the index value, followed by Denmark at 19%) we find a heavy bias towards just three sectors: financials (mainly Swedish banks including Handelsbanken), industrials (think of picks and shovels engineering giant Atlas Copco) and healthcare (primarily drugs giant Novo Nordisk at 9% of the index). None of this should be terrifically surprising to an international investor, but I still think that the mainstream non-Nordic investors should consider popping an ETF like this into their core portfolio. In particular, I’d advance five relatively simple positive reasons for focusing on Nordic equity markets.
1. Corporate governance within the Nordic regions is usually of the very highest standard with the odd exception of A and B class shares at some family-owned firms. If places like China and Russia rank at the very bottom of any investors preferred places to do business, these Nordic countries must rank at the very top
2. Internationally open mega-caps dominate the index, all of which are likely to benefit from high margin, international trade. That should make this index a classic beta on the expanding global economy
3. Much more importantly, equity investors neglect hard facts about national balance sheets at their peril, which should work to the favour of the key Nordic states. Bond investors have long been drilled into connecting the dots between balance-sheet risk and pricing risk, but equity investors sometimes ignore these issues. The eurozone is a classic example. Many investors failed to see the politically inspired car crash of the Med Club debt fiasco and those “investment scars” continue to dog many an investor’s strategy. Part of the reason that so few investors have bought into the Spanish or Italian equity markets (the IBEX 35 and the FTSE MIB) is that they worry about both countries’ precarious balance sheets. Ditto for Japan, where a hard core of investors (me included) have doggedly avoided investing because we’re concerned that the Land of the Rising Sun could implode over the next decade. The Nordic countries represent a complete contrast with sound balance sheets and local banks that have gone out of their way to build plentiful capital bases. Some of the countries (I’m thinking of Norway here) even boast sovereign wealth funds of truly massive proportions
4. Linked to this last issue is the idea of safe-haven equities. To be fair the MSCI Nordic index fell almost as hard as any other developed world markets in 2008 (down 53% that year) but the presence of strong local currencies (bar Finland’s adoption of the euro and Denmark’s shadowing of the single currency) gives the major countries an ability to flex their currencies in an economic meltdown and attract inward money flows from investors worried about catastrophic economic collapse.
5. Finally, on a simple equity fundamentals basis I’d suggest that this index (and accompanying ETF) gives you a tightly focused handful (the top 10 stocks account for 41% of the index cap) of defensive stocks, generating a well backed dividend yield of 3.6%. The mix also feels about right with big industrials favouring emerging market states, banks favouring domestic consumer demand, and pharmaceutical stocks providing defensive, steady sales growth. Unlike the FTSE 100, with its equally attractive dividend yield, one doesn’t have to put up with an unhealthy number of dodgy Russian businesses nor an unsightly range of out-of-favour mining stocks.
So, for 30 basis points (the annual total expense ratio or TER), I think this DeAWM ETF provides a sensible mix of positives for most investors (for investors preferring a synthetically replicated ETF, the Amundi ETF MSCI Nordic UCITS ETF (CN1) tracks the same benchmark and comes in fractionally cheaper with a TER of 0.25%), although I have one important caveat. Contrarian and conviction investors might find themselves slightly more tempted by an alternative from New York-based ETF sponsor Global X Funds, namely the Global X FTSE Norway 30 ETF (NORW). This US-listed ETF tracks the constituents of the FTSE Norway 30 Index. Whereas the MSCI Nordic index trades at around 16 times earnings (falling to 13 times forward numbers), the Norwegian version trades at 13 times earnings. Crucially, you’re also buying a more focused energy play, with big outfits such as Statoil and Seadrill dominating the index. Personally, I like that safe haven, hard currency, energy intensive mix, plus there’s the bonus of that lower PE ratio! The only downside is that the TER on the Global X fund is marginally higher at 0.50%.
The views and opinions expressed herein are the views and opinions of the author, David Stevenson, and do not necessarily reflect those of ETF Strategy.