Eric Dutram: With the focus remaining on Europe and comments from the ECB driving the markets across the globe, many investors are reevaluating their exposure to the region. Although many are still dialing back holdings across some of the riskiest countries in the area, some intrepid and long-term focused investors are ratcheting up exposure to the strong nations in the bloc, such as Germany.
The industrial powerhouse of Europe has been under pressure as of late but many investors still think it could be a solid value. The country has one of the lowest unemployment rates in the region, a favorable trade balance, and a debt situation that appears to be in check as of now (read Germany ETFs On The Rise).
Furthermore, a weak euro actually can help Germany to an extent as it makes the country’s many quality exports cheaper on the world market making them more competitive when compared to comparable Japanese or American goods.
Thanks to these trends, German assets in the ETF world have been increasing at a solid rate from a year-to-date look, especially when comparing fund flows among European nations. In fact the most popular German ETF (NYSEARCA:EWG), has added about $150 million in AUM this year while similar funds tracking France and Italy have both added less than $50 million in the same time frame.
Yet while this suggests some optimism regarding the German economic model, it also implies that the German funds have become an increasingly crowded trade as of late, as more dollars move into the famously strong nation. This situation has left some German assets at elevated levels suggesting that some might be better off looking beyond the country for exposure to strength in the broad euro zone region (see Three Great ETFs For Your IRA).
Unfortunately, this is becoming increasingly difficult as more nations appear to be in trouble or on the verge of issues at some point in the near future. It is not just the PIIGS but many are also starting to include the likes of Belgium and even France as potential trouble spots down the line, suggesting that choices beyond Germany are few and far between.
Still there are a few good choices left outside of Germany that investors have probably overlooked but could be great picks for the long-term. These countries, although dwarfed by the size of the German economy, still have ETF options available that can provide direct and diversified access to their economies.
Below, we highlight three European ETFs that track strong countries besides Germany, giving investors a new and hopefully less crowded way to play the in-focus space:
An often overlooked strong economy in Europe comes from the Netherlands, one of the 20 largest economies in the world. The country is one of the few to still have a golden “AAA” rating from all three of the major ratings agencies and looks well positioned in the current economic climate.
In fact, the country has lower unemployment than the EU average while it is one of the few with a favorable current account balance. Furthermore, many of its top exports go to strong European nations while its relatively small size ensures that it is never the focus in terms of countries needing to bailout the PIIGS nations.
The main way to play the Netherlands in ETF form is via theiShares MSCI Netherlands Index Fund (NYSEARCA:EWN). This ETF tracks the MSCI Netherlands Investable Market Index which looks to give investors broad exposure to the Dutch equity market (see Three European ETFs That Have Held Their Ground).
Currently, the product charges investors 52 basis points a year in fees but pays out a robust yield of about 3.3%. Volume is usually around 73,000 shares while the average bid ask ratio is low, suggesting a low total cost for investing in this product.
The ETF holds 56 securities in total in its basket and has a heavy focus on large cap stocks. In terms of sectors, consumer staples takes the top spot thanks to a massive allocation to Unilever, while industrials (17%), and financials (14%) round out the top three.
Finland stands out as the only Scandinavian nation that uses the euro as its currency. As a result, it is a top choice for those looking to invest in the Scandinavian model while still remaining in the common currency.
The country has a relatively low public debt level and has a favorable current account balance as well. Furthermore, the nation does a great deal of its exports with nations outside of the euro zone or Germany, ensuring that the impact of the crisis isn’t too severe for the nation.
Lastly, the country is a very easy one to do business in as it ranks in the top twelve from this metric according to the World Bank and in the top five from the World Economic Forum Competitiveness Survey. This suggests that the country is well positioned to be a hub of activity and is far friendlier to business than many of its neighbors in the region (see Three European ETFs Beyond The Euro Zone).
Investors now have a direct way to play Finland via ETFs thanks to the recently launched iShares MSCI Finland Capped Investable Market Index Fund (BATS:EFNL). This product tracks the Finnish equity market, giving investors broad exposure to the country’s stocks.
Volume is still a little light thanks to the newness of the product, while expenses come in at 53 basis points a year. This, along with the more illiquid nature of the Finnish market, suggests that total costs may be higher thanks to wider bid ask spreads.
In total, the ETF holds 45 securities in its basket with heavy weights going to four companies; Nokia, Sampo, Kone, and Fortum. This gives the fund a tilt towards large caps as well although small and micro caps do account for over 20% of assets as well.
From a sector look, industrials take the top spot at 30% while basic materials (15%) and financials (12%), and technology (12%) round out the top four. It should also be noted that nearly 22% of the product goes into companies in the heavy machinery segment, suggesting that the product may have a different exposure focus than many others in the region.
Due to the heavy banking exposure that the country has with Hungary, Austria is often overlooked as a strong country. Nevertheless, the fundamentals are still strong while the country is one of the richer ones in the world from a per capita GDP look.
While the current account balance may not be as favorable as others on the list, the country does a great deal of trade with Germany, ensuring that it is heavily exposed to their robust economy. Beyond the Germans, Vienna and Austria in general, is often viewed as a gateway to Eastern Europe, making the area a developed market hub for access to the quickly growing region (read more on ETFs at the Zacks ETF Center).
These strengths, along with the low inflation and unemployment in the country, are likely to outweigh some of the debt and banking negatives that some investors may associate with Austria at this time. Furthermore, it is important to remember that the country is doing well from a budget perspective—acting proactively—and looks to have a balanced budget by 2016 and public debt less than 60% of GDP by 2020.
To target the Austrian market in ETF form, investors have had theiShares MSCI Austria Index Fund (NYSEARCA:EWO) for quite some time. The product debuted in 1996 and gives investors direct exposure to stocks that are based and trade in the Vienna markets.
Currently, the product has about $55 million in AUM while charging investors 52 basis points a year in fees. Volume is solid at about 111,000 shares a day giving the product good bid ask spreads while the yield is a solid 4.2% a year.
The ETF’s basket currently consists of 32 securities with close to 30% going to three firms; OMV, Erste Group Bank, and Andrtiz. Like other funds on the list, large caps dominate the holdings list while there is a definite tilt towards value securities.
In terms of sector exposure, industrials account for 24% while financials (18%) and basic materials (15%) round out the top three. For low levels of assets, utilities and technology account for just 8% in total of the product, giving the fund a tilt towards banks, real estate, and heavy machinery firms instead.
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