iShares Holland ETF Immune to 'Dutch Disease' Thanks to the Euro

 |  About: iShares MSCI Netherlands ETF (EWN)
by: Eric Dutram

One of the biggest stories from the first half of the year in the world of finance has been the sharp decline in the value of the euro. Once regarded as one of the strongest currencies in the world, the monetary unit has fallen on hard times as some of its weaker southern European users seemed to be headed straight for default earlier this year. While the future of many economies in the region remains in doubt, one thing is for certain; the euro has fallen sharply against the dollar so far in 2010 (producing a loss of close to 12% on the year) and faces significant obstacle in reclaiming lost ground.

This sharp downturn has lead many of the region’s leading economies to rethink their membership in the currency bloc, with some calling for Germany to remove itself from the euro in order to avoid much of the debt-fueled turmoil of its southern counterparts. While some members of the monetary union may be regretting their decision to adopt the euro, at least one is likely very happy to have made the switch to the common currency despite the recent turmoil: the Netherlands.

Back before the Netherlands adopted the euro, the country had used the guilder as its national currency. Things went relatively smoothly until the country came down with a bad case of the ‘resource curse,” or what is often called “Dutch Disease” today. This crisis stemmed from events in the 1960’s, when the country found vast natural gas deposits in the North Sea that would eventually make the country the fifth largest exporter of the commodity in the world. As the country began to exploit the reserves and export gas abroad, it caused the Dutch currency to rapidly appreciate, making all other Dutch exports less competitive in world markets. In effect, the discovery of the massive natural resource deposit was more of a curse than a blessing, since it ultimately eroded the country’s competitive advantage in export markets. The large influx of capital into the oil and gas sector also helped to push prices of consumer goods higher, forcing the Central Bank to raise rates and further stifling economic growth in the non-resource sectors of the Dutch economy.

But now that the Netherlands uses the euro as its currency, the effects of Dutch disease are all but a memory. This is because as the Netherlands exports its natural gas to surrounding countries (all of which use the euro) it does not cause a currency imbalance that pushes up the value of the Dutch currency relative to its neighbors. In this sense, it is much like the abundance of oil in Texas or Oklahoma; these two states do not have their own currencies, so their economies do not feel the effects of a rising currency since they make up a relatively small portion of trade within the common monetary zone.

The same is true for the Netherlands in regards to trading within the EMU; it is only the 6th largest economy in the European Union, making up less than 5% of the EU GDP. Moreover, the country sends a majority of its exports to three countries; Germany, Belgium and France, all fellow euro zone members. Since the country makes up such a small percentage of the EU GDP, it won’t have a major impact interest rate decisions, thereby avoiding a quick spike in the value of its currency like it did in the days of the guilder.

Dutch ETF In Focus

The main ETF tracking the Dutch economy is the iShares MSCI Netherlands Index Fund (NYSEARCA:EWN), which tracks the MSCI Netherlands Investable Market Index. The fund holds 58 companies in total but allocates almost 75% of its assets to the top ten holdings, suggesting that the fund is heavily concentrated in a handful of mega caps. Its top holdings include big weightings in consumer giant Unilever (NYSE:UL) (NYSE:UN) (17.5%), financial powerhouse ING (11.5%), and consumer electronics maker Philips Electronics (NYSE:PHG) (11.3%). In terms of sectors, EWN has close to a quarter of its assets in consumer goods companies, with sizable allocations going towards financials (18.4%) and computer hardware (16.6%) firms as well.

EWN charges an expense ratio of 0.52%, which is slightly higher than other ETFs in the category. The fund is up more than 25% over the past 52 weeks, but like much of Europe it is down so far in 2010, posting a loss of nearly 10%. While this is roughly triple the loss of the S&P 500 in the same time period, it is far lower than most ETFs in the European Equities ETFdb Category. In fact, of all the ETFs tracking countries that are using the euro, only Belgium (NYSEARCA:EWK) has outperformed EWN.

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Disclosure: No positions at time of writing.

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