Nordic Countries Provide Some Portfolio Protection

By Evan Zacharias May 21, 2010 10:00 am

With Global X Nordic 30, it's possible to invest in Europe while avoiding the risks inherent with the euro.

Editor's Note: This article originally appeared on Seeking Alpha.

For investors seeking to diversify their portfolios with an international equity ETF, the Global X Nordic 30 (GXF) does just that by following the FTSE Nordic 30 Index. The four Nordic countries that have the greatest to least holdings are Sweden (45.32%), Norway (19.25%), Denmark (18.02%), and Finland (17.41%). The majority of GXF’s holdings lie in the financials, industrials, and technology, from greatest to least, respectively. The top 10 holdings of this ETF comprise 56.3%, which include major names such as Ericsson (ERIC), Nokia (NOK), and Nordea (NDBAY.PK). iShares is the only other ETF issuer that gives exposure to this region with their ETF iShares MSCI Sweden Index (EWD).

GXF has returned 3.02% based on the closing market price since its inception (19 August, 2009, to May 18, 2010) in comparison with EWD, which returned 5.43% in the same period.

In comparing the major holdings of both funds there are several instances where there's a large spread between the percentage of assets held by both iShares and GlobalX funds. Although both ETFs track two different indices, both of the indices have a basket of 30 underlying securities: EWD’s three largest holdings are Nordea Bank at 12.36%, Hennes & Mauritz (HMRZF.PK) at 12.11%, and Ericsson has 12.36% of its assets in Nordea, compared to the 8.52% that GXF holds.

Given the recent crisis and bailout in Greece, a plummeting euro, and a lack of investor confidence in the European markets in general, these Nordic countries may be a good way to add international diversification to one’s portfolio, without taking on the risk of investing in Western Europe or the Euro. In the Wall Street Journal article “Ratings Warnings Keep Currency Investors on Edge” by Fabio Alves (15 March, 2010), Alves notes that although the US, UK, France, and Germany are considering spending cuts in an attempt to reduce their debt and keep their credit rating status and investor confidence, the risk of these countries failing to get their finances under control has risen. Alves goes on to quote Wells Fargo currency strategist Vassili Serebriakov, stating that the fiscal policy for these countries will remain as an important factor for the value of these currencies in the following months, whereas the Australian, Canadian, and Norwegian currencies will remain in demand because they are backed up by a “robust growth profile and strong public finances”.

In other words, not only will investing in GXF, any Canadian ETF (IQ Canada Small Cap ETF (CNDA), Claymore/SWM Canadian Energy Income (ENY), iShares MSCI Canada Index (EWC)), or any Australian ETF (iShares MSCI Australia Index (EWA), IQ Australia Small Cap ETF (KROO)) give an investor a chance to expose themselves to international markets, but it will also give the investor added protection against the risk of a currency devaluation and a falling credit rating. However, investing only in Canada or Australia limits the amount of diversification, compared to the diversified 4-in-1 approach through the Nordic 30 ETF.

Prior to the release of GXF, investing in the Nordic countries was limited to EWD, without the possibility of investing in any ETNs that track any Nordic indices. In terms of gross domestic product, the projected 2009 change in GDP (according to the IMF) for Sweden, Norway, Finland, and Denmark, respectively, are: -6.0%, -1.2%, -1.0%, and .03%. In comparison, according to the Bureau of Economic Analysis, the US change for 2009 GDP is -1.3%.

Pictured below is the performance of GXF since its inception and two funds that track the MSCI European Index in the same period. One thing to bear in mind, however, is that while Sweden, Denmark, and Finland are all members of the EU, Norway is not; the two ETFs that follow the MSCI European Index are the Vanguard European (VGK) and iShares MSCI EMU Index (EZU). In the past nine months, GXF has increased by 3.02% in value compared to EZU, which has faced a 10.75% loss and VGK only suffered a 9.2% loss in the period.

Although contagion has affected the Nordic 30 and thus has reduced the value of GXF, the same is to be said for so many other markets in the global economy. Any major developed country and the markets and investors within that country will bear any amount of systemic risk through the risk of corporations and countries defaulting. The best strategy to protect one’s portfolio against such risk is to invest in countries and indices with solid fundamentals and promising outlooks. However, should the speculation and rumors come true that the euro will dissolve, anyone invested in a country that uses the euro as its currency will certainly be in for a rocky, downhill ride. Of the four Nordic countries, Finland is the only one that uses the euro, whereas the other three countries continue to use their own currency, giving the investor some protection against a possibly failing euro.

Read more by Evan Zacharias at Street One Financial.