Visual Risk Analysis Of The Nordic ETF (GXF)

by on March 28, 2013 | ETFs Mentioned:

The ETF industry continues to democratize asset classes, as mainstream investors can now access more corners of the global market than ever before in an easy, cost-efficient manner. In fact, the ETF landscape has grown so much that investors can now even choose between different approaches when it comes to establishing exposure to foreign markets. For example, someone looking to add exposure to European stocks can undertake a variety of approaches to accomplish this goal; for starters, investors can opt for a broad-based ETF that includes a portfolio of securities from a basket of countries. Digging further, investors can also choose a country-specific ETF if they wish to really focus on a particular market [see 101 ETF Lessons Every Financial Advisor Should Learn].

The lineup of investment strategies is further expanded when you consider the fact that you can also select an ETF based on the type of market-cap exposure you are looking for. For example, invesors looking to tap into Brazil’s market may wish to opt for a small-cap focused ETF instead of a more popular broad-based option (which is likely dominated by multinational, large-cap corporations) since the smaller companies are more likely to be impacted by local demographics and favorable consumption trends [try Free ETF Screener]. 

The sheer variety of investment approaches available in the ETF universe prompts a very important and logical question: is one better than the other? In other words, is someone looking to add exposure to Europe better off with a broad-based solution like Vanguard’s VGK or a country-specific fund like iShare’s Germany ETF (EWG)? As you may have suspected, the correct answer is neither, as each approach has its merits and drawbacks that make it more appropriate for certain investors in the right market environment; in other words, when it comes to ETFs, one size does not fit all. 

How the Nordic ETF Stacks Up Against Nordic Country Funds

One particular fund that lends itself perfectly to answering the age old question of broad-based versus country-specific exposure is the Global X FTSE Nordic 30 ETF (GXF, B+). This ETF offers exposure to the Nordic-bloc in Europe by tracking a basket of companies from the nations of Sweden, Denmark, Norway and Finland [see Euro Free Europe ETFdb Portfolio].

While the various Nordic country ETFs out there are generally impacted by the same macroeconomic factors, they are far from identical. The chart below illustrates the differences between risk/return profiles among the biggest Nordic country-specific ETFs and the broad-based Global X FTSE Nordic 30 ETF.

Note that the risk/return profile is defined by a fund’s 200-day volatility and trailing one-year return, while the respective annual dividend yield of each ETF is represented by the size of each bubble:

  • iShares MSCI Sweden Index Fund (EWD, B+)
  • iShares MSCI Finland Capped Investable Market Index Fund (EFNL, B+)
  • iShares MSCI Denmark Capped Investable Market Index Fund (EDEN, B+)
  • Global X FTSE Norway 30 ETF (NORW, B)

Keep in mind that the above chart is based on trailing returns, and as such, its composition is bound to change over time. There’s no universally right choice from the above ETFs; for some, the broad-based approach offered through GXF makes sense, while risk-tolerant investors may opt for EDEN in search of more lucrative returns. On the other hand, although EFNL boasts the highest relative volatility, it may be the best choice for dividend investors given that it also features the highest yield. The takeaway here is to remember to take a good look under the hood before pulling the buy trigger as each product features a host of unique advantages and nuances.

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Disclosure: No positions at time of writing.