One of the most attractive advantages of the exchange-traded fund industry is the ability for investors to easily tap into foreign equity markets. Prior to ETFs, mutual funds were the only vehicles available for individual investors to gain broad, diversified exposure to stocks outside of the U.S.. Thankfully, there are now plenty of low-cost ETF options that offer investors access to not only particular regions, but also to specific countries.
A close look under the hood of some of these products, however, can reveal some rather questionable holdings and biases. These strange holdings are typically seen in the more hyper-targeted funds, like single-country ETFs. In this piece we’ll take a close look at four of these funds, highlighting a few of these oddities.
America’s Chocolate Consumption Fuels the Switzerland ETF
|ROG||ROCHE HOLDING AG||13.69|
|CFR||COMPAGNIE FINANCIERE RICHEMONT SA||4.44|
|CSGN||CREDIT SUISSE GROUP AG||3.84|
|ZURN||ZURICH INSURANCE GROUP AG||3.79|
iShares’ MSCI Switzerland Capped ETF (EWL) is designed to capture the performance of the Swiss equity market. Its portfolio, however, consists of only 40 individual holdings, with more than 70% of assets allocated to the top 10.
Its top holding is Nestle, the maker of a wide range of food and beverage products – including its popular chocolate line, which accounts for over 17% of EWL’s total assets. Though the company is domiciled in Switzerland, a look at its annual report reveals that the majority of its sales revenue actually comes from the U.S. [see 10 of the Best ETF Trades of All Time]:
Sales from the U.S. account for roughly one quarter of Nestle’s total sales. Switzerland sales, however, account for only 1.6%. Sales from China, France, Brazil, and Germany make up another quarter of Nestle’s total sales.
North America’s Beer Demand Drives Belgium ETF
|ABI||ANHEUSER BUSCH INBEV SA||23.68|
|KBC||KBC GROEP SA||7.38|
|GBLB||GROUPE BRUXELLES LAMBERT SA||4.6|
|COLR||ETABLISSEMENTEN FRANZ COLRUYT N.V.||2.55|
Like EWL, iShares MSCI Belgium Capped ETF (EWK) also holds a relatively small number of stocks. Its top 10 holdings account for more than two-thirds of total assets.
One holding in particular, however, is allocated nearly a quarter of AUM – Anheuser-Busch InBev. AbInBev is domiciled in Belgium, but its major EBITDA and volume contribution by region is not Europe:
North American contribution to ABInBev’s normalized EBITDA accounts for roughly 38%. Latin America and Mexico account for just over 50%. Europe’s contribution to EBITDA, however, is only about 7.5%.
North American Pharmaceuticals Sales Propel Denmark ETF
|NOVO B||NOVO NORDISK ORD CLASS B||23.68|
|DANSKE||DANSKE BANK A/S||7.8|
|MAERSK.B||A.P. MOELLER-MAERSK AS CLASS B||6.74|
|COLO B||COLOPLAST B||4.68|
|CARL.B||CARLSBERG AS ORD CL B||4.51|
|VWS||VESTAS WIND SYSTEMS A/S||4.23|
The MSCI Denmark Capped ETF (EDEN) is currently the only fund to offer targeted exposure to the Danish equity market. Its portfolio consists of just over 40 individual holdings, of which more than one-third is allocated to the top 10 securities.
Novo Nordisk, a Denmark-based global healthcare company, is allocated over 20% of EDEN’s total assets. Though it has consumers in more than 180 countries, the majority of the company’s sales are not derived from Denmark or Europe.
North American sales account for over 42% of Novo Nordisk’s 2013 sales. Europe accounts for about 26%. Sales from Asia, which include Japan, Korea, and China, total just under 15% of the company’s annual sales.
Emerging Market Consumer Goods Appetite Drives Netherlands ETF
|UNA||UNILEVER DRC NV||18.28|
|INGA||ING GROEP NV||13.94|
|ASML||ASML HOLDING N.V.||8.47|
|PHIA||ROYAL PHILIPS NV||7.62|
|AKZA||AKZO NOBEL N.V.||4.46|
|AH||KONINKLIJKE AHOLD NV||4.45|
|REN||REED ELSEVIER N.V.||4.01|
|DSM||KONINKLIJKE DSM N.V.||3.19|
iShares’ MSCI Netherlands ETF (EWN) is the only option available for investors looking to tap into the Dutch equity market. The fund invests in roughly 55 individual holdings, the majority of which are large- and giant-cap companies. Furthermore, EWN allocates over 70% to its top 10 holdings [see Owning the Market Isn't As Easy as it Sounds].
Netherland-based Unilever, however, is allocated over 18% of EWN’s total assets. The company is one of the largest consumer goods manufacturers in the world, selling everything from soap to olive oil. A closer look at its sales shows how the company does not get the majority of its revenue from the Netherlands.
*Note that turnover refers to annual sales.
Sales from Asia, Africa, the Middle East, Turkey, Russia, Ukraine, and Belarus account for 40% of Unilever’s annual sales. North and South American sales account for 32%, while European sales account for 27.1%.
The Bottom Line
A closer look under the hood of some of these single-country ETFs often reveals large biases towards companies that actually generate the majority of their revenues from outside their domiciled country. While this is not necessarily a bad thing, investors should realize that these funds are not entirely “pure plays” on a country’s local economy since foreign consumption habits greatly affect the performance of these ETFs.
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Disclosure: No positions at time of writing.