Quick. Name the top-performing ETF in 2013 that tracks a developed Eurozone nation that has not recently been immersed in economic controversy. With the controversy caveat, Italy and Spain ETFs are excluded. Greece is now an emerging market so it is not the answer to this riddle either. The iShares MSCI Germany ETF (NYSEArca: EWG) makes for a logical choice. That would also be wrong because the iShares MSCI Netherlands ETF (NYSEArca: EWN) is up 14.9% year-to-date compared to a 10.3% gain for EWG.
EWN’s 2013 performance is something of a surprise given the dichotomy presented to investors by the Dutch economy. “Sleepy” is one way of describing it, but Eurostat data indicate GDP growth there has been either been negative or virtually non-existent for the past several years. At the same time, the Netherlands also has the second-lowest unemployment rate in the Eurozone behind Germany. [Netherlands ETF Hits A Snag]
The Netherlands also has an AAA credit rating, one of only four Eurozone members that can make that claim. Germany, Finland and Luxembourg are the others. On the other hand, the European Central Bank recently said housing is the biggest problem facing the Dutch economy and there is rising animosity among average Dutch citizens about Europe’s sovereign debt woes. A June poll showed 39% of those surveyed support the Netherlands leaving the euro, according to The Economist.
As The Economist noted, the Netherlands was among the ring-leaders of Northern European countries that demand Europe use a 3% budget deficit limit on PIIGS nations looking for financial support. Even amid a contracting economy and faltering support for the euro among ordinary citizens, EWN has managed to jump nearly 22% in the past two years while being far less volatile than EWG. EWN has a three-year standard deviation of 22.42% while EWG’s is almost 26%, according to iShares data.
Part of the reason investors have sent EWN higher this year may be the fund’s large allocation to consumer staples shares. That sector accounts for a third of the ETF’s weight. Alone, Unilever (NYSE: UN), the maker of the Lipton and Dove brands, is 18.3% of EWN’s weight. That is 700 basis points ahead of the fund’s second-largest holding, ING Groep (NYSE: ING). [Stick to Staples ETFs in August]
If there is a risk with the large allocation to staples it is that the sector is usually richly valued compared to others and that gives EWN the look of being a tad pricey relative to comparable funds. EWN’s current P/E ratio is slightly higher than EWG’s and what investors will find on the equivalent France and Sweden ETFs.
iShares MSCI Netherlands ETF
ETF Trends editorial team contributed to this post.