Late last week iShares completed the latest addition to its ETF product line, launching three new funds. While each of the new products is unique in some way, the one that likely caught the eye of most investors was the MSCI Ireland Investable Market Index Fund (EIRL). This ETF is the second attempt to offer U.S. investors exposure to the Irish economy; Northern Trust launched the NETS ISEQ 20 Index Fund (IQE) in 2008 but the fund closed then the company pulled out of the ETF industry less than a year later (see ETF Hall of Shame: Nine Exchange-Traded Debacles).
In launching EIRL, iShares may appeal to the millions of second and third generation Irish, an Ireland ETF is sure to attract a fair amount of interest. Americans are always eager to display their Irish heritage–real or imagined–and connect to the land of their ancestors. EIRL offers a way for U.S. investors to invest directly in the Irish economy, deepening a connection between the economies that is somewhat hard to explain. The nations are not particularly large trade partners and don’t share any particularly noteworthy economic arrangements. But there is a “strong diaspora of well-connected Irish executives around the world,” writes John Sullivan, noting that 45% of Fortune 500 CEOs carry an Irish surname.
Moreover, tourism from the U.S. and elsewhere is a major driver of the Irish economy (and a major cause of recent economic difficulties). An investment in EIRL may be tempting as a way to deepen the Ireland experience. Anyone who has ever downed a pint in Donegal or made the trek up Croagh Patrick no doubt feels a slight urge to plunk down some cash into the still green Ireland ETF. But anyone who’s picked up a newspaper or turned on a computer in the last month is no doubt hesitant to establish or increase exposure to Europe, especially to an economy included alongside Italy, Spain, and Greece in the recently-coined “PIIGS” bloc of debt-laden, default-prone countries.
So putting any emotional ties to the Emerald Isle aside, is there a practical case for an investment in Ireland?
From Celtic Tiger To PIIGS
Until 2008, Ireland was one of the great economic success stories of the last century. Overhauls to the country’s school system began paying dividends, producing an abundance of well-educated young people. The combination of a skilled (and English-speaking) workforce and attractive corporate tax rate led to an influx of foreign capital; companies like Pfizer, Microsoft, and Google set up major operations in Ireland, and university graduates began staying home instead of pursuing opportunities in London or New York. The “Celtic Tiger” roared, and the Irish economy expanded at an impressive rate throughout the 1990s and 2000s; the property boom in Dublin made Florida’s look tame.
When Lehman Brothers collapsed in September 2008, Ireland’s economy began a steep decline. Irish banks were, of course, weighed down by bad property loans and needed government assistance to survive. Government budgets, which rely heavily on both revenues from property sales and steady tourism, dried up as the real estate market ground to a halt and discretionary travel budgets around the world were slashed.
The Road Less Traveled
Just as the Irish people tend to stand out in a crowd, the Irish economy has distinguished itself from the rest of the world over the last two years. The Irish approach to tackling the recent recession was vastly different than the strategies implemented by the U.S. and much of the rest of the developed world. Most governments cranked the printing presses into high gear and began injecting round after round of capital into the global economy. Ireland went the opposite direction, imposing draconian budget cuts and reeling in government spending that had accelerated during the boom.
The measures drew a fair amount of criticism, and the road to recovery hasn’t been a smooth one. Unemployment has continued to rise, as has the government deficit. But there are now signs of greener pastures ahead. The European Commission is now projecting that the Irish economy will expand by 3% in 2011, up from a previous forecast of 2.6% growth. The more immediate outlook has also brightened; contraction this year is expected to be just 0.9%, a downward revision from the previous estimate of 1.4%. “Ireland is adjusting for recovery,” said the report. Perhaps more importantly, the general government deficit is now expected to decline to 11.7% of GDP this year; previous estimates had called for a deficit equal to 14%.
Ireland took its bitter medicine on its own terms. That same pill is now being forced down Greece’s throat, and resistance to the much-needed assistance has cast doubt over the Mediterranean nation’s future. Ireland is by no means out of the woods yet, but the steps taken in recent years have allowed the country to avoid the uncomfortable situation in which Greece now finds itself.
Inside The Ireland ETF
EIRL tracks the MSCI Ireland Investable Market 25/50 Index, a benchmark designed to measure the performance of equity securities in the top 99% by market capitalization of equity securities listed on stock exchanges in Ireland. According to the EIRL fact sheet, the fund has only about 21 holdings, a good reminder of just how small Ireland actually is (it has approximately the same population as Kentucky). A handful of sectors are represented in EIRL; materials account for about a quarter of assets, with consumer staples making up another 23% and industrials about 18%. The remainder is split between financials (15%), health care (13%), and consumer discretionary (7%). Noticeably absent is exposure to energy and technology, voids that will give EIRL a somewhat unique risk/return profile relative to other ETFs in the Europe Equities ETFdb Category.
Ireland has set its economy up for success over the last two years by self-imposing strict austerity measures and making difficult budget decisions that Greece is just now facing. It remains unclear, however, if the measures will be sufficient to ward off a further economic collapse. The Irish government continues to boost its stake in banks, and the size of toxic loans continues to swell. EIRL is a risky play in the current environment; if the European Commission’s report is right, this ETF could surge over the next two years. But if the trouble in Greece begins a domino effect, Ireland isn’t too far from the starting point, and could easily get caught up in a European debt crisis.
Disclosure: No positions at time of writing.