McCall’s Call: Scandinavia Is More Than A Tourist Destination

May 19, 2010

The New Jersey-based financial adviser debuts with ‘McCall’s Call’ on IndexUniverse.com, a weekly column that will feature actionable investment ideas using ETFs that are based on current trends in financial markets and the economy.

I did some boots-on-the-ground investment research in Scandinavia after wrapping up at the Inside ETFs Conference in
Amsterdam
last month, and found there what I think many ETF investors need: diversification of their portfolios with below-average risk, and returns that, over time, should keep pace with other developed markets.

IU_MattMcCallColumnThe Nordic region, as it’s also called, is often overlooked by investors, who view it as a low-growth area. It’s true you can’t compare Scandinavia to Brazil or
China, but investors who dismiss it or haven’t seriously considered it, do so at their loss. Scandinavia consists of Sweden, Norway, Finland and Denmark, and is home to some household names in the
U.S.
such as cell phone maker Nokia, or IKEA, the global chain of household goods superstores. It also has niche sectors, notably timber.

Investors can consider four ETFs, the broadest of which is the Global X FTSE Nordic ETF (NYSEArca: GXF), which captures all four countries. Sweden makes up more than 40 percent of GXF, and those who want to take the full plunge can buy the iShares MSCI Sweden ETF (NYSEArca: EWD). I like EWD because it’s more liquid than GXF, but the diversification of GXF makes it the better long-term investment.

In terms of price/earnings ratio, GXF stood at 16 at the end of April compared with 24.74 for EWD, the pure Swedish play. By comparison, the MSCI EAFE Index Fund (NYSEArca: EFA), iShares’ ETF of companies in developed countries excluding the U.S. and
Canada, had a P/E of 22.50 at the end of April.

Another way to play
Sweden directly is through the Rydex CurrencyShares Swedish Krona ETF (NYSE: FXS). The krona has been tracking the euro closely in the past two years, but has stabilized this year and the outlook is promising. If the dollar continues its long-term downtrend, which I believe it will, and the euro has a Greece-related cloud over it, the Swedish krona could come out as a winner into 2011.

For investors wanting a niche ETF, the Claymore/Beacon Global Timber ETF (NYSEArca: CUT) gives investors 18 percent exposure to Finland and
Sweden
through a handful of timber companies based in the region. I like CUT for a number of reasons, one being the exposure to
Scandinavia.

Running The Numbers

Swedish companies make up a big part of GXF at 43 percent, followed by Denmark at 20 percent and Finland and
Norway, both at 18 percent. Financial services and telecommunications together make up half of the ETF, with the largest holding being
Finland
’s telecom giant Nokia (NYSE: NOK).

EWD is at an 18-month high, powered by its exposure to the financial services (26 percent), telecom (22 percent) and industrial materials (21 percent). Two well-known companies in the top 10 holdings are LM Ericsson Telephone (NasdaqGS: ERIC) and automaker Volvo. The government recently forecast economic growth to pick up to 2.5 percent in 2010 and 3.9 percent by 2011, levels not seen in years.

The ETF tracks the MSCI Sweden Index, which is too new to have the historical data to compare the region with other countries. But the MSCI Nordic Countries Index, which has been in existence for more than 10 years, has average annual returns of 4.8 percent over the past five years, making it one of the best-performing MSCI developed-markets regional indices.

So to bring this whole discussion full circle,
Scandinavia is more than beautiful places to live. There’s also money that can be made for ETF investors, if you’re willing to think outside the traditional investment box.


Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a
Ridgewood, N.J.-based wealth-management firm specializing in investment strategies using ETFs.

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