Milton Friedman may no longer be with us, but the legend of the Nobel Prize winner has continued to build. Before his death in late 2006, Friedman predicted that the euro, one of the world’s most widely-used currencies, would not be able to withstand its first economic crisis. With much of Europe teetering on brink of fiscal collapse, the viability of the region’s common currency system has been called into question by economists around the globe. Since the inception of the euro in early 1999, sixteen countries have adopted the currency. Many recent entrants into the monetary union have celebrated their inclusion, hoping for membership to bring along substantial economic benefits.
However, in the current environment, the euro has often acted as a drag on economic growth. International investors have been hesitant to invest in euro-denominated assets, worrying that structural weaknesses in the currency will eat into returns and undermine the stability of financial markets in the region. Against this backdrop, investors have divided Europe into two distinct categories: markets that have adopted the euro, and those that have not. Most of the ETFs in the Europe Equities ETFdb Category fall into the former group [see Hardest Hit Europe ETFs From The First Half Of 2010].
There are a number of countries within Europe that for various reasons haven’t joined the euro zone; some such as Switzerland, have elected to maintain currency independence, while others have been rejected due to failure to meet certain requirements. Below, we outline four ETFs that offer exposure to European equity markets that fall outside the euro zone [for more ETF ideas, sign up for our free ETF newsletter]:
iShares MSCI Sweden Index Fund (EWD)
iShares‘ EWD tracks the MSCI Sweden Index, a benchmark that measures the performance of the Swedish equity market. The fund maintains the heaviest tilts towards the financials (27%), industrial materials (22%), and telecom (21%) sectors of the market. Like many international ETFs, EWD does not meddle with smaller companies, investing in primarily giant and large market capitalization firms. The largest holdings include telecom giant Ericsson, Hennes & Mauritz, and Nordea Bank.
Sweden has not strayed from its currency, the krona, since its inception in 1873. It’s no coincidence that EWD is one of the best performers among all European ETFs in 2010, outpacing many broad-based funds by almost 20% and some of the hardest hit single-country ETFs by as much as 30% [see Sweden ETF Bucks The Trend].
iShares MSCI Switzerland Index Fund (EWL)
EWL seeks to replicate the MSCI Switzerland Index, a benchmark that measures the performance of the Swiss equity market. Some of this ETF’s top holdings are well recognized names; chocolate producer Nestle and financial behemoths UBS and Credit Suisse all receive big weightings while giving the largest allocations to the health care (30%), consumer goods (23%), and financials (21%) sectors [see the holdings breakdown here]. Similar to EWL, this iShares ETF also invests in primarily giant and large market capitalization firms.
Switzerland uses the Swiss franc, a currency that has shown impressive strength against the euro. Until recently, the country’s central bank had been aggressively intervening to prevent a rapid appreciation; now it will try to stop regulating the currency and allow the franc to trade more freely against the euro [see Switzerland ETF: Exposure To Europe’s Bright Spot]. EWL hasn’t done as well as EWD this year, but has still outpaced broad-based Europe ETFs by a wide margin.
iShares MSCI United Kingdom Index Fund (EWU)
EWU is linked to the MSCI United Kingdom Index, a benchmark that measures the performance of the British equity market. EWU maintains a pretty even sector split, favoring the financials (22%), energy (21%), and industrial materials (15%) sectors. The fund focuses on primarily giant cap firms; HSBC, BP, Vodafone, and Shell are among the largest holdings [see The Unlikely ETF Loser From Gulf Oil Spill].
Although the UK doesn’t use the euro, the pound hasn’t done much better so far this year, losing significant ground to the dollar and other world currencies. The UK is facing many of the budget issues that have weighed on mainland Europe, and seems to be headed for a prolonged period of low growth as well.
Global X FTSE Nordic 30 ETF (GXF)
GXF measures the unique FTSE Nordic 30 Index, a benchmark that tracks the performance of the largest and most liquid companies in Sweden, Denmark, Norway and Finland. Of these four countries, only Finland (which accounts for about 15% of assets) utilizes the euro; Sweden, Denmark, and Norway maintain “currency independence.” This fund has about 30 holdings, with over half of its assets allocated to the top ten holdings. GXF spreads exposure across all sectors of the economy, with financials (29%) and telecom (20%) firms receiving the biggest allocations [see GXF's fact sheet here].
GXF offers exposure to economies that have been among the few bright spots in Europe, and this fund has distanced itself from “euro-heavy” ETFs to far in 2010 [see Two "Anti-Euro" ETF Plays].
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Disclosure: No positions at time of writing.