Oil Crash Hits These European ETFs Hard [Vanguard FTSE Europe ETF, Global X Funds]

europeCountries with heavy oil exposure have faced extremely rough trading in recent months as steep losses started to pile up in the space. This prime commodity has entered bear territory having slid more than 40% since June and touched the five-year low level. Brent crude prices are presently hovering around the $60/bbl. level. A supply glut, ‘no production cut’ by the OPEC nations and anemic demand outlook are wrecking havoc on this liquid commodity.

This has taken a toll on oil-rich nations which are among the top exporters of the commodity. As a result, the stocks and related ETFs of these nations have seen plunging share prices for quite some time now.

One such nation is Norway. Despite being the world’s fifth largest oil producer and second major natural gas exporter after Russia, Norway is yet to get a strong footing in terms of overall growth. Notably, Norway derives over 20% of its national income from its fossil fuel production.

In fact, the nation is so vulnerable to oil price collapse, that its central bank suddenly slashed interest rates by 25 bps to 1.25% in early December. Not only this, its central bank raised concerns about the growth prospect of its economy saying that Norwegian growth will be sluggish unless Brent crude rebounds over the $70 level, as noted by Bloomberg.

The news pushed its currency, the krone, down to the 11-year low level against the greenback and the five-year low level relative to the Euro.

Basically, slowing activity in the all-important energy sector and a drastic decline in oil prices to keep the business environment at the same level in the near future forced the central bank to take such a step. Per Telegraph, several new oil projects in the North Sea and Europe might freeze as plummeting prices compel oil producers to postpone their projects.

The situation is so severe that the Norwegian central bank expects a 15% decline in oil investments in 2015 with a visible aftershock on the unemployment front and domestic economy. Being part of the already troubled Europe, the oil crash is strong enough to spoil Norway’s near-term growth outlook. The central bank indicated a “50-50 chance” of an additional rate cut next year.

Statoil, a Norwegian oil company having huge state ownership, has lost about 50% in share price over the last six months (as of December 15, 2014). Statoil is considering a suspension in expensive oil projects as these are unlikely to return adequately given the current oil prices, per worldpress.org.

In any case, three Scandinavian nations ─ Norway, Denmark and Sweden ─ are presently bearing the brunt of the waning Euro zone. The Scandinavian countries ─ so far successful in navigating through the European turmoil ─ depend heavily on mainland Europe for export. Thus, slow demand from the mainland Europe weighed heavily on the Nordic region.

ETF Impact 

All these trends have combined to push investors out of Scandinavian securities. Danish ETF iShares MSCI Denmark Capped Investable Market Index Fund (EDEN), which has added about 5.1% so far this year thanks to its relatively better-placed economic profile among the Euro zone strugglers, has shed about 10.8% in the last 26 weeks (as of December 15, 2014).

The positive year-to-date return of EDEN was in stark contrast to the 8% loss experienced by the broader and biggest Europe ETF FTSE Europe ETF (VGK).Another pillar of Scandinavia, Sweden, saw its ETF ─ iShares MSCI Sweden ETF (EWD) ─ lose about 7.7% in the year-to-date frame and has plunged about 10.2% in the last 26 weeks.  

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