European equities have faced a tough stretch throughout 2010, as storm clouds brought on by unprecedented debt crises have yet to disperse. With drivers of GDP growth facing significant hurdles, many investors have pulled assets out of the beleaguered continent, selling off euro-denominated assets on their way to safe havens. Mounting debt balances and disparate economic outlooks have the euro zone facing the most severe crisis in its relatively short history. Unfortunately for the rest of Europe, all of the 27 nations in the European Union have been financially quarantined in the minds of investors, though only 16 of them have adopted the euro. Those countries that have maintained currency independence find themselves with valuable flexibility in the current environment. And while equity markets have been hammered by general risk aversion, some non-euro European economies offer bright outlooks, making them potentially intriguing investment options.
Perhaps the strongest country to emerge from Europe’s dark financial times is Sweden. The Scandinavian nation has stuck with the krona, a currency that is supported by one of the developed world’s most unique economies. In recent years Sweden underwent a wave of privatization, as the government sold off massive stakes in everything from banks to telecom and even Absolut vodka.
Sweden now boasts the EU’s smallest budget deficit as a percentage of GDP, thanks to sound economic policies and the avoidance of major debt issues in recent years. That fiscal flexibility has afforded policymakers an arsenal of tools to combat the economic slowdown that many governments throughout Europe lack. So it is not surprising that Sweden is beginning to distance itself from its euro-neighbors [see also Non-Euro ETF Options].
The second quarter of 2010 was an impressive one for this bolstering economy. Not only did GDP grow by 3.7% in Q2, but Sweden predicted growth of 3.8% for the remainder of 2010 and growth of 3.6% for 2011. The Swedish economy is showing all signs of recovery, as more than 80% of the largest companies reported earnings that beat expectations this past quarter. Much of this pleasant surprise is attributable to a jump in exports, which are still making up ground lost during a steep decline heading into the recent recession.
With the nation showing promising signs of growth, we outline two ETF options to take advantage of the strong Swedish economy [see also BMW Drives Germany ETF (EWG) Sharply Higher].
iShares MSCI Sweden Index Fund (EWD)
This fund tracks the MSCI Sweden Index, a benchmark that includes primarily large cap Swedish equities. The fund’s top holdings include Ericsson Telephone Company (13%), Nordea Bank (10.4%), and Volvo Corporation (4.7%). EWD keeps its grasp on three main sectors of the market; financials (26%), industrial materials (24%), and telecom (23%) make up a significant portion of total assets. EWD has been one of the best performers in the Europe Equities ETFdb Category this year, delivering a small gain as most other Europe ETFs have sunk lower [see more at EWD's fact sheet].
This ETF offers exposure to Sweden’s major economic outputs; heavy allocations to the industrial materials and telecom sectors hone in on the major economic of Sweden’s export-heavy economy.
Global X FTSE Nordic 30 ETF (GXF)
This ETF follows the FTSE Nordic 30 Index, a benchmark that tracks the performance of the 30 largest and most liquid companies in Sweden, Denmark, Norway and Finland. Though this fund allocates to several countries, Sweden accounts for nearly half of total assets, making it a viable play for Swedish growth. GXF mirrors some of EWD’s top holdings; Ericsson, Nordea Bank, and Volvo are all among the top allocations of this ETF. Also similar to EWD is GXF’s sector breakdown; financials leads the way at 27%, followed by telecom (20%) and industrial materials (14%). This fund has also posted a gain on the year, distinguishing it from most of the other European equity ETFs [see all of GXF's holdings here].
Along with Sweden, the Norwegian economy is another that is often overlooked, but quite strong [see Who Else Wants A Norway ETF?]. This fund may be a good choice for those who believe Sweden will grow, but allows exposure to other strong economies to diversify holdings.
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Disclosure: Photo courtesy of Alexandre Buisse. No positions at time of writing.