by Jared Cummans
The European debt crisis along with the possible collapse of the euro have investors fleeing from their investments in much of Europe. Many have attempted to find safe havens in European nations that have no ties to the euro, but with little luck. There are only a select number of ETFs that do not have their claws sunk deep into the failing euro and Noway, one of Europe’s strongest economies, is one of them. Unfortunately for investors seeking to make a play on the Norwegian economy, there is not a viable pure-play ETF option. This is unfortunate because the Norwegian economy could save investors’ foreign capital in these rough economic times.
Why It Would Make a Strong ETF
Norway has a lot to offer investors; the small nation has the third highest GDP per-capita in the world, and was ranked first on the Human Development Index in 2009. This impressively high GDP has given Norway one of the highest standards of living in the world, but perhaps more important than a high GDP, is the fact that Norway lies outside of the European Union, and has not adopted the euro as its currency. Not having direct ties to the scrutinized euro, Norway has been able to maintain what many call the world’s most stable economy.
Despite the country’s small size, it is an exporting powerhouse; the country is the 3rd largest natural gas exporter, 5th largest oil exporter, and second largest fish exporter globally. While traditional fuels are clearly a big industry, alternative energies are still in focus, with hydroelectric plants accounting for 98-99% of the country’s electric power ensuring that the country can take full advantage of any spikes in oil prices by continuing to sell almost all of their production abroad. With a strong economy based on a multitude of in-demand exports, its a wonder that an ETF has not taken advantage of these opportunities yet.
This wealth of exports has given the country an extremely large trade surplus which has led to one of the biggest sovereign wealth funds in the world. This fund allows the citizens to reap the benefits of the oil boom long after prices come back down to more moderate levels and can also provide current income for the government as well. The program also allows the government to use the fund to spend more in the country when falling oil prices slow down the economy, thus insulating the nation from economic shocks better than some of its neighbors.
Norway handles taxation and government benefits in a much different way from the United States. The country has one of the highest top income tax brackets in the world, approaching 50%, and has a Value Added Tax (VAT) of 25%. However, this allows the country to pay out minimum guaranteed pensions, disability compensation, unemployment benefits, and heavily subsidized or free health care for the public. While this system may discourage entrepreneurship and wealth accumulation, it does provide a solid quality of level for virtually every citizen ensuring that the country has a robust consumer economy since high savings rates are not as necessary in the famous welfare state.
How A Norway ETF Could Work
A Norwegian ETF could track the OBX Index on the Oslo Stock Exchange. Although the exchange isn’t exactly the most liquid one in the world, the country’s market still has a larger market capitalization level than other countries that have ETFs.In fact, the country’s stock market has a larger market capitalization level than even Thailand or Indonesia; favorite markets of many investors which both have more than ten times the population than the sparsely populated Nordic state. By focusing on the OBX, the fund would likely have a heavy weighting towards the energy sector with a special focus on Statoil. The company is the largest offshore oil producer in the world and one of the 15 largest oil companies in the world and would likely receive a high weighting in this proposed fund. Another large allocation for a Norway ETF would probably have to go to both the financial and telecommunication sectors. Currently, about 23% of the OBX index goes to two companies; the country’s largest bank, DnB NOR, and the country’s largest telecommunications provider, Telenor (OTCPK:TELNY).
GXF: Close, But Not A Pure Play
For investors currently seeking exposure to Norway, the Global X FTSE Nordic 30 ETF (NYSEARCA:GXF) is among a select number of funds which offers a chance to invest in the interesting economy. While the fund offers material exposure to the country, it only allocates 14.8% of its funds to the nation with the rest of the assets going towards Sweden, Denmark, and Finland. The Scandinavian countries may be similar in geographic location and government philosophy, but are very different economically. For example, Finland uses the euro as its currency, lumping it in with the rest of the European nations under scrutiny as their currency is plummeting. Both Sweden and Denmark maintain their own currencies and specialize in exports like timber and iron ore as opposed to the more oil focused Norway. Despite the recent turmoil in Europe, the fund has performed well; it has posted a gain of 7.1% over the course of 2010 and a gain of 15.1% over the past 52 weeks. (click to enlarge)
Disclosure: No positions at time of writing.
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