The Global X FTSE Nordic Region ETF: The Perfect Fit

| About: Global X (GXF)

Summary

The fund is concentrated, holding 30 of the region’s top companies.

Almost every company held in the fund has a broad global reach.

Inclusion in the index requires ample market trading liquidity.

European economies get a lot of undeserved bad press. Take the European Union for instance. A few of its economies are indeed lagging like Portugal and Greece, but at the same time several are excelling like the United Kingdom and Germany. The same may be said for the core Eurozone economy. Then there are the Central and Eastern European (CEE) states, several of whom have made remarkable strides within the EU. With a moment's reflection, an economic comparison can be made with the United States. Some states, like New York, California and Maryland are economic powerhouses, whereas Mississippi, Louisiana and Illinois are still struggling with tough economic times. The same is true of the wider region of North American economies like Canada and Mexico. Some states or provinces do well with natural resources or foreign investment while other must rely on seasonal tourism or agriculture. It takes governments with foresight and courage to forge ahead to establish economic zones while being as inclusive as possible. It is, in fact, the basic purpose of an economic zone: to eliminate economic border constraints and provider opportunity for the weaker entities through unencumbered economic interaction with the stronger entities.

It's different from the investor's point of view, however. For the investor, it's always a matter of risk vs reward. The majority of individual retail investors do not have loads of free capital to risk on large scale 'turn-around' stories no matter how tempting the total returns might be. The average mid-career investor, saving for retirement or college fund, must look for ways to 'pick and choose' the best potential reward with the least possible risk. Those higher reward ventures are best left to the so 'high rollers'; hedge funds, venture capitalist and the like.

A good example of a region whose economies are outperforming its neighbors is collectively known as Scandinavia. These are the nations of Sweden, Norway, Finland, Denmark (and sometimes Iceland). The region of Scandinavia is loosely defined and more a matter of cultural and historical relations. However, a word or two needs to be said about their legal economic affiliations. First, Norway is, essentially, an independent economic nation whose primary trading partners are in western Europe most of whom are European Union members. Importantly, Norway uses its own free-float currency the Krone. Sweden is a member of the European Union; it retains the use of its free-float currency, the Krona. Denmark is also a member of the EU and for the time being is using its own currency, the Krone. However, Denmark is in the process of adopting the Euro and must maintain a fixed rate (called a peg) with the Euro before it fully adopts the currency. It should be noted that (about) 7.5 Danish Krone is a virtual Euro. Finland is all in: EU and Euro. Although Iceland is considered a part of Scandinavia, it is not an EU member and uses its traditional Krona.

The point of the matter is this: for those investors who wish to pick and choose the best regional ETFs with stability and reasonable returns, the Global X family of funds offers the FTSE Nordic Region ETF (NYSEARCA:GXF). Global X seeks to:

...provide access to high quality and cost efficient investment solutions... ...recognized for its smart core, income, alpha, risk management and access suites of ETFs...

Indeed this is the case with the Nordic Region Fund. The fund's tracking index is the FTSE Nordic 30 Index.

As for the tracking index itself:

...The FTSE Nordic 30 Index is designed to represent the performance of the Danish, Finnish, Norwegian and Swedish Stock Exchanges in real time for the purpose of derivative trading. The index consists of the top 30 companies in the FTSE All-World Index - Nordic Region, ranked by full market capitalization. In order to be eligible for inclusion in the Index, securities (other than new issues) must have a velocity of 40% or more. Velocity is based on the previous six months trading and is defined as the total value of six months exchange turnover annualized and shown as a percentage of the full market capitalization...

The description includes the terms "derivatives" and "velocity", however, don't be put off. The fund does not involve any derivatives, only common stock. The index is composed of companies whose stocks have high trading volume. This works in favor of the investor. Velocity may be more familiarly expressed as liquidity. Since the velocity measurement is based on the previous six months, this is an indication of a large cap stock, i.e., similar to trading volumes experienced by, for example, GE (NYSE:GE), Intel (NASDAQ:INTC) or Alphabet, (NASDAQ:GOOGL) here in the U.S. Indeed, this will prove to be the case.

The FTSE Nordic 30 includes the four continental nations of Scandinavia. The chart below demonstrates that the sector allocation is, for all intents and purposes, identical.

Data from FTSE and Global X

When the returns are tabulated and compared, again, the fund does reflect the FTSE index.

Annualized Returns Comparison

Year to Date

One Year

Three Years

Five Years

Since Inception 8/17/2009

GXF NAV

-2.43%

-9.91%

7.76%

5.84%

9.16%

GXF Shares

-1.86%

-9.57%

7.88%

5.88%

9.16%

FTSE Nordic 30 Index

-3.70%

-10.30%

7.45%

5.73%

9.04%

Data from Reuters

As the index suggests, there are indeed 30 holdings in the fund, plus a small cash position. A quick over view of the fund gives a good indication of its true nature. Since there are so few holdings, they are group together where appropriate. For Example, Financials are only financials, however, the few IT, Tech and Telecom Services holdings are grouped together for conciseness; however, the description will make clear their sub-classifications.

Data from Global X

The heaviest allocation is the Financial Sector, followed by Industrials and Health Care; 82.51% of the fund. The smaller sectors are Consumer Products, Energy and Materials.

Financial

28.90%

Ticker

Fund Weight

Market Cap

(in USD Billions)

Dividend Yield

5 Year Dividend

Growth Rate

Total Debt to Equity

ROI:

ROE:

Primary Business

Nordea Bank

OTCPK:NRBAY

5.80%

$44.60

6.01%

19.92%

667.54

NA 12.30

Retail, corporate banking, wealth management

Sampo OYJ

OTCPK:SAXPY

4.19%

$27.72

4.17%

14.29%

21.09

NA 15.50

Property, casualty, life, liability, asset, business, agricultural, insurance

SwedBank

OTCPK:SWDBY

4.13%

$24.88

5.91%

NA

791.32

NA 14.74

Savings, brick & mortar, telephone and internet; loans, credit, corporate lending

Danske Bank

OTCPK:DNSKY

3.33%

$26.33

2.99%

NA

714.24

NA 4.21

Retail banking, mortgages, insurance, RE, asset mgmt; business & corporate banking

Svebska HandelsBanken

OTCPK:SVNLY

3.16%

$25.34

5.02%

16.95%

1032.5

NA 12.21

Private and Corporate banking, financial services, mortgages, credit cards

Investor (Industrial Holding company)

OTCPK:IVSXF

3.07%

$28.663

2.72%

17.61%

20.32

5.11 6.23

Minority holdings in Nordic big cap industry; also in EQT and Investor Growth Capital funds

Skandinaviska Enskilda

OTCPK:SVKEF

2.75%

$23.14

4.75%

36.56%

560.83

NA 13.33

Merchant, retail, wealth mgmt, insurance

DNB ASA

OTCPK:DNHBY

2.47%

$20.93

3.40%

16.77%

473.32

NA 13.60

Full range of retail, business, corporate; Offices also in Asia and Americas

Averages

3.61%

$27.70

4.13%

*20.35%

535.15

ROE:

11.515

*x-SWEDa and DANSKE

Data from Reuters

There are, surprisingly, no REITs. With one exception, they are all big cap, well established banks serving their region, the Baltics Europe including the UK and to a lesser extent, Asia and the Americas. The only unusual position in the sector is Investor, which is not a 'financial' per se. Investor, is a holding company, buying minority positions in mostly industrials, but also owns portions of private equity group 'EQT' and venture capital fund 'Investor Growth Capital'. The holdings do have very high total debt to equity ratios. That's usually an indication of an aggressive growth strategy. This may not be the case here. The overnight reserve rates in these nations are at, near or below 0 in order to deter 'safe-haven' capital inflows, which strengthen the currency, making their exports more expensive. These high ratios may reflect offsetting overnight reserve rate strategies.

Health Care 18.20%

Ticker

Fund Weight

Market Cap

(in USD Billions)

Dividend Yield

5 Year Dividend

Growth Rate

Total Debt to Equity

ROI:

ROE:

Primary Business

Novo-Nordisk

NVO

16.77%

$113.1

1.39%

27.78%

1.46

75.36

81.73

R&D, manufacturing, marketing of biopharma for diabetes and obesity. Africa, Americas, Europe, Russia, Asia,

Coloplast

OTCPK:CLPBY

1.43%

$16.30

2.20%

44.27%

2.12

13.74 16.36

R&D, manufacturing, marketing of Ostomy, Continence, Urology, Chronic wound care products. Global distribution

Averages

9.10%

$64.65

1.80%

36.03%

1.79

44.55 49.05

Data from Reuters

There are only two holdings for Health Care, but it's just as good, if not better than a portfolio of several holdings. Novo-Nordisk ranks with the premier global pharmaceutical companies as best in class. Coloplast designs, manufactures, markets and distributes niche personal care products. Together, they cover a significant portion of the sector and contribute to the efficiency of the fund.

Industrials 19.73%

Ticker

Fund Weight

Market Cap

(in USD Billions)

Dividend Yield

5 Year Dividend

Growth Rate

Total Debt to Equity

ROI:

ROE:

Primary Business

Assa Abloy

OTCPK:ASAZY

3.54%

$22.15

1.18%

12.54%

57.43

12.31 20.46

Ingress and Egress security solutions and components

Svenska Cellulosa Aktiebolaget

OTCPK:SVCBY

3.03%

$25.34

5.02%

7.25%

53.78

5.84 8.36

Sustainable forest products, personal care, hygiene, kitchen paper, bath tissue, packaging

Atlas Copco

OTCPK:ATTLF

2.95%

$31.90

2.58%

14.87%

50.27

19.11 30.80

Industrial and medical solutions compressors, blowers, filter, vacuum, air, piping; safety, productivity, ergonomics focus

Kone OYJ

OTCPK:KNYJY

2.90%

$19.155

2.98%

13.05%

9.29

36.75 44.34

Elevators, escalators, travelator, auto doors; access control systems

Sandvik

OTCPK:SDVKY

1.77%

$12.61

3.98%

28.47%

121.31

6.53 14.90

Mining and Construction tooling solutions; industrial metal cutting

AP Moeller Maersk

OTCPK:AMKBF

1.72%

$31.54

18.93%

NA

NA

NA

International ocean freight and oil shipping; towing and salvage

SKF

OTCPK:SKFRY

1.25%

$7.74

3.70%

9.46%

99.06

7.41 18.86

Lubrication, bearings, seals, services, support, solutions

Volvo

OTCPK:VOLAF

2.57%

$21.55

3.40%

NA

181.72

4.50 11.91

Industrial equipment construction division of Volvo Group

Averages

2.47%

$21.50

5.22%

*14.27%

**81.837

**13.20 **21.38

*x- AMKBF, VOLAF

**x- AMKBF

Data from Reuters

There seems to be a common theme among Nordic industrials. They are focused on sustainability, recycling and environmental responsibility. This often gives their industrial sector a more cyclically defensive bias. Two examples from the sector are Svenska Celluosa, a forest product paper and packaging company and Kone, essential a 'people mover' designer, manufacturer and service company. Both involve products or services that will be in demand in both good and bad times.

Technology 15.68%

Ticker

Fund Weight

Market Cap

(in USD Billions)

Dividend Yield

5 Year Dividend

Growth Rate

Total Debt to Equity

ROI:

ROE:

Primary Business

Nokia

NOK

4.84%

$28.92

2.17%

-20.87%

31.58

7.44 11.96

Network software, hardware, services; networks, voice, data, global mobile

Ericsson

ERIC

4.72%

$31.676

4.09%

12.34%

18.81

5.84 7.67

Telecom service, software, broadband, cloud services, network infrastructure

TeliaSonera

OTCPK:TLSNF

2.28%

$21.20

7.01%

5.92%

100.11

7.13 13.71

Telecom service, network access, mobile services, broadband and landline services

Telenor

OTCPK:TELNY

2.20%

$26.51

4.75%

23.90%

114.97

7.01 9.16

Mobile telecom services, voice, data, internet, telephony and television, landline

Hexagon

OTCPK:HXGBF

1.64%

$12.4

1.03%

28.67%

48.70

8.45 13.36

IT operations research services; industrial productivity via sensors, software, workflow data

Averages

3.14%

$24.14

3.81%

9.99%

62.83

7.17 11.17

Data from Reuters

When one thinks of technology in the north countries, Nokia and Ericsson immediately come to mind. The interesting holding is Hexagon which applies real time monitoring and data collection towards improving efficiencies and productivity. This may be concisely described as operations research services.

Consumer Products 9.71%

Ticker

Fund Weight

Market Cap

(in USD Billions)

Dividend Yield

5 Year Dividend

Growth Rate

Total Debt to Equity

ROI:

ROE:

Primary Business

Hennes & Mauritz

OTCPK:HNNMY

5.75%

$53.4

3.05%

4.04%

0.00

41.57 44.71

Design and manufacture of apparel, sportswear, footwear accessories

Pandora

OTCPK:PNDZF

2.40%

$14.32

1.09%

NA

55.17

41.42 55.91

Precious metal jewelry and accessories

Carlsberg

OTCPK:CABGY

1.56%

$12.83

1.53%

20.79%

82.84

-2.20 -5.11

World renowned brewer and soft-drink manufacturer

Averages

3.24%

$26.85

1.89%

12.42%

46.00

26.93 31.84

Data from Reuters

The fund seems well thought out in its construct and the consumer sector exemplifies this. It covers the spectrum of consumer products from the very basics to the very discretionary in just three holdings.

Energy 3.57%

Ticker

Fund Weight

Market Cap

(in USD Billions)

Dividend Yield

5 Year Dividend

Growth Rate

Total Debt to Equity

ROI:

ROE:

Primary Business

StatsOil

STO

2.41%

$49.24

5.87%

15.63%

77.90

-4.86 -10.32

Global oil and gas exploration, development production

Fortum OYJ

OTCPK:FOJCF

1.16%

$13.1

9.35%

5.39%

44.15

-8.63 -13.94

Heat and electric production and distribution; plant management services and solutions

Averages

1.79%

$31.17

7.61%

10.51%

61.03

-6.75 -12.14

Data from Reuters

Again, two holdings of best-in-class companies covering the industry from wellhead to home; simple, well founded and concise.

Materials 3.31%

Ticker

Fund Weight

Market Cap

(in USD Billions)

Dividend Yield

5 Year Dividend

Growth Rate

Total Debt to Equity

ROI:

ROE:

Primary Business

Novozymes

OTCPK:NVZMY

1.92%

$12.36

0.89%

21.14%

12.73

19.15 24.69

Industrial bioengineered enzymes for consumer products; agricultural and feed additives; wastewater treatment

Yara International

OTCPK:YARIY

1.39%

$12.22

3.35%

23.64%

18.32

12.18 14.75

Sustainable fertilizer production, marketing and distribution ammonia, nitrates, nitrogen, phosphorous and potassium

Averages

1.66%

$12.29

2.12%

22.39%

15.53

15.67 19.72

Data from Reuters

Two unique holdings covering the very essence of materials manufacturing products that are less sensitive to business cycle swings: enzymes for household cleaning products, wastewater recycling, agricultural feed, food flavorings, ingredients, and essential fertilizer chemicals all produced with sustainability and environmentally friendly methods.

A few things need to be said for the fund itself. The expense ratio just a bit higher than average at 0.50%; the distributions are annual. The fund is not large with 30 holdings and roughly $52,249,671.00 in assets. Volume seems reasonable with a three month average daily volume of about 4300 shares/day; more than enough liquidity for a retail position.

Smaller, focused ETFs seem to have an advantage over those larger comprehensive funds with hundreds of holdings. Having two or three large funds will most likely result in 'overlapping positions' and may have risks not easily noticed among so many holdings. Also, smaller ETFs create the opportunity to piece together the best performers of a region, in a much focused way, and the Global X FTSE Nordic Region ETF is a perfect fit for what an interested retail investor needs to construct an efficient yet diversified portfolio.

Lastly, the investor should be aware of a slight currency risk. On December 3rd, the ECB announced a continuation of its weak Euro policy. The non-Eurozone or other European central banks must somehow respond in order to maintain purchasing power parity. Europe, EU or not, has a large, internal trading network so purchasing power parity must be maintained. Hence, when translating back to U.S. Dollars, there may be a short term risk, if any at all; it will present an opportunity if it occurs.

One last word about Global X: the website presentation is well thought out and interesting. The link to the GXF page contains a link to a 'minisite'. The minisite presents an overview of the Scandinavian region: the economies, sovereign credit quality, demographics and culture; a welcome addition to the usual facts & figures presentation.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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