A Look at the Index Fund Offering Diversification in Safe Sweden

Includes: EWD, FXS
by: Power Hedge
MarketWatch recently ran an article focused on an IMF report that the most financially secure nations in the world are the Scandinavian countries, with a handful of others mixed in. I have analyzed several Norwegian companies in past articles along with the Global-X Norway ETF (NYSEARCA:NORW) but I have not given the same attention to Norway’s partner on the Scandinavian Peninsula.
Sweden is the 57th largest country in the world by land area and has a population of 9.3 million. Sweden is a member of the European Union although it is not part of the Euro zone (countries that have adopted the Euro as their currency). Since 1873, Sweden’s currency has been the Swedish krona. The Swedish krona has been progressively rising significantly against the dollar over the last year as this percentage chart from OANDA shows:
This is also evident by looking at the returns from the CurrencyShares Swedish Krona Trust (NYSEARCA:FXS) over the past year.
(Click charts to expand)
Investors can profit from a currency that is increasing in value directly by buying the currency. There is another way to profit, however. Investors in companies that reported earnings in Swedish krona would have benefited from this strengthening currency. The reason for this is that it will increase the company’s results when converted into U.S. dollars. This is true even if the company’s earnings remain static in SEK (the Swedish krona’s ISO symbol) terms. This is because the krona correspond to a greater amount of dollars. Of course, as investors we generally prefer companies with increasing earnings over ones with static earnings.
It can be difficult for the average investor to invest in Swedish stocks. Many of the companies are thinly traded in the United States and are not available on any major U.S. stock exchange. Fortunately, iShares offers an ETF that tracks the MSCI Sweden Index. The iShares MSCI Sweden Index Fund (NYSEARCA:EWD) was created on 3/12/1996, to “track the price and yield performance, before fees and expenses, of publicly traded securities in the Swedish market, as measured by the MSCI Sweden Index” (quote from iShares). On March 31, 2011, EWD consisted of the following securities:
(Source: iShares with some descriptive sector entries by the author)
The fund’s current holdings are published online on a monthly basis. Investors who are reading this article or who are considering investing in this fund after the end of April, 2011, may want to go to the iShares website and review the current positions of the fund (that may be found here). The table above is correct at the time of writing and publication of this article.
At the end of March, 2011, EWD held investments in 34 Swedish companies in a variety of sectors. The fund is broken down as follows:
Through these companies, the fund offers a respectable cross section of industries and broad exposure to the Swedish economy. There is no oversized exposure to any one sector of the economy or to any one company. The largest individual company holding that is owned by the fund is Ericsson (NASDAQ:ERIC), the largest company in Sweden and a global communications technology powerhouse, at 10.47% of the total fund holdings.
The largest sector exposure in the fund is ten industrial companies making up 26.98% of total holdings. A very close second place is held by eight financial companies (of which four are banks) at 24.84% of total holdings. The ten industrial companies which make up the fund span a range of industries, from automotive to security system manufacturing, from metrology to steelmaking. There is no substantial exposure to any one product category, with the caveat that nearly all of these companies are manufacturing products to be used by other businesses rather than by consumers. Thus, these are largely capital goods manufacturers. Volvo AB (OTC:VOLAF), the largest single industrial stock in the fund, is both a consumer and a commercial manufacturer.
The iShares MSCI Sweden Index Fund has barely lagged the S&P 500 (NYSEARCA:SPY) over the trailing six month period.
Over the trailing 12-month and 24-month periods however, we have a completely different story.
As these charts show, the iShares MSCI Sweden Index ETF (EWD) has substantially outperformed the S&P 500 over these longer periods of time. It is worth noting that this outperformance occurred during the same time period that the S&P 500 experienced one of the largest bull runs in history from its low two years ago.
Sweden is an industrial and technological powerhouse with a conservative banking sector. The country has a fiscally responsible government, a strengthening currency, and an economy with a history of outperforming the S&P 500. For these reasons, the iShares MSCI Sweden Index Fund looks like an excellent way to diversify a portfolio of American and Euro zone stocks, especially in light of the pressures that both areas are now facing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.