Northern Trust Enters ETF Arena With First ETFs To Track Major Foreign Market Indexes

With its new line of exchange traded funds (ETFs), Northern Trust opted to stay true to their principles while traveling around the world.

Is it a sign that ETFs are slowly entering the mainstream and gaining acceptance as more than just a passing fad? An institution as old and well-known as Northern Trust entering the market could be a sign.
 

"We know who we are. We knew what we needed to bring to the market, something that was consistent with our notions of asset management overall," says Peter Ewing, the managing director of Northern Trust's ETF group.

The first batch of funds, the first to track major foreign market indexes, were a year in the making. Ideas were kicked around as the world's third-largest asset manager of institutional index-based assets felt it needed to seriously consider an ETF product line. In 2007, the management committee gave the go-ahead and they filed with the Securities & Exchange Commission (SEC).

"Our opening salvo is traditional," Ewing says. But the provider isn't averse to more inventive ETFs and strategies. But for now, "We want to stay true to our principles."

Northern Trust's ETFs, which all have an expense ratio of 0.47%, are:

• NETS S&P/ASX 200 Index Fund (AUS): Represents Australia
• NETS DAX Index Fund (DAX): Tracks Germany's major exchange
• NETS FTSE 100 Index Fund (LDN): Invests in the largest companies by market cap on the London Stock Exchange
• NETS CAC40 Index Fund (FRC): Represents France
• NETS Hang Seng Index Fund (HKG): Represents Hong Kong
• NETS TOPIX Index Fund (TYI): Represents Japan

At a later date, there will be funds issued that cover Belgium, Ireland, Portugal, South Africa and more.

Belgium ETF Dinged by Financials, But Any Turnaround Could Deliver a Boost

What comes to mind when you hear the iShares MSCI Belgium (EWK) exchange traded fund (ETF)?

It gives a lot of banking exposure - these days, that's tantamount to a four-letter word. But if you can look beyond the turmoil of the credit crunch, EWK can look undervalued. While it has a slew of financial holdings that make up around 50% of the fund, Gary Gordon for ETF Expert says it's undervalued by any fundamental valuation model.

Belgium also struggles as an importer of commodities - it's resource-poor, and the commodity boom elsewhere might be taking a toll on the country.

However, Gordon says that it's less volatile than many of its single-country ETF peers. While he steers clear of single-country funds and favors a more regional approach, these funds can be good for a disciplined investor who has a stop-loss plan. Belgium could be a fund for the investor who believes that the financials are primed and ready for a turnaround. This fund could be ready to benefit more than most, thanks to its heavy allocations in the sector.

You Can't Always Judge an ETF By Its Name

In December, Barclays added another international exchange traded fund (ETF) to its lineup: the iShares MSCI Kokusai Index Fund (TOK).

 TOK covers 1,203 holdings in 22 developed markets, minus Japan, with the United States taking the most holdings at 50%. The second-largest constituent is the United Kingdom, at 12%. There are also holdings in Austria, Belgium, Ireland, Italy, New Zealand, Spain, Sweden and Switzerland.

The largest holding is ExxonMobil Corp. (XOM) at 2%. It's most heavily concentrated in financials, at 24.7%. When the fund launched, Matt Hougan for Index Universe wondered if it wasn't a strange product to launch on a U.S. exchange since, after all, most U.S. investors are already invested in this market and would instead want exposure to Japan in their portfolios.

But the most intriguing thing about the fund, we think, is its name: "kokusai" is the Japanese word for "international." It's an interesting choice of word for a fund with no holdings in Japan.

Market and ETF Facts to Consider

There's a lot going on in the markets and exchange traded funds (ETFs).  Matt Hougan for Index Universe looks at 10 interesting market facts and we've added some ETF related information.

1. The U.S. stock market is uneasy. Volatility is the best performing index this year, up 138.7% on the CBOE Volatility Index, compared to a year ago.
2. Technical analysis aside, the Dow Theory says "If the train slows down, the economy soon follows." iShares Dow Jones Transportation Average (IYT) is up 0.4% year-to-date.
3. Utilities are going off, as you may know from those huge checks you write each month. Utilities Select Sector SPDR (XLU) is up 15.7%.
4. Some indexes following Europe aren't as pretty as you may think, even with a strong currency.  Although we find the iShares S&P  Europe 350 Index (IEV) is up 14.7%. Isn't the euro worth more than gold right now?
5. European countries and their markets aren't always in sync. Performance ranges up and down, depending which country you're in. iShares MSCI Germany Index (EWG) is up 32% and iShares MSCI Belgium Index (EWK) is down 0.5%.
6. The China/Japan dichotomy, with such proximity, what gives? iShares MSCI Japan(EWJ) is down 1.3% and iShares MSCI Xinhua/China 25 Index (FXI) is up 66.9%.
7. Understanding contango in commodity investing is important.  It's confusing and has investors angry.
8. One of best domestic sector ETFs is Aerospace & Defense -PowerShares Aerospace and Defense (PPA) is up 24.6%. The worst sector is homebuilding - SPDR S&P Homebuilders (XHB) is down 53.4%.
9. Small-cap growth is doing well, maybe not as well as in recent past, but they are holding their own. iShares S&P SmallCap 600 Growth (IJT) is up 5.4%, compared to the S&P 500 which is up 3.6%.
10. Dividends aren't offering the safe haven thought of through tough markets. iShares Dow Jones Select Dividend Index (DVY) is down 6.0%.

If History Repeats Itself, Belgium's ETF Is Due for a Rebound

Although consumer confidence in the European markets has been shaky lately, some exchange traded funds (ETFs) seem likely to bounce back in the coming months. One such country is Belgium, which has previously seen such a trend. The Belgian National Bank's business confidence gauge, which is often a main indicator of euro-zone economic growth, dropped to its lowest level in more than five years in September 2001. However, it rebounded a month later and continued to stabilize in the following months, reports Emma Charlton for MarketWatch. Currently, iShares MSCI Belgium Index (EWK) is up 7.5% year-to-date and is nearing in on its long-term trend line (200-day moving average).

Belgium has a modern, private-enterprise economy that has taken advantage of its central geographic location, highly developed transport network and diversified industrial and commercial base. The country has few natural resources and must import raw materials and export a large volume of manufactures. This makes its economy unusually dependent on the performance of world markets. Public debt is more than 90% of Belgium's GDP, according to the CIA World Factbook. 

Declining European ETFs

Some country-based exchange traded funds (ETFs) in Europe seem to be slipping lately. iShares MSCI Italy Index (EWI), iShares MSCI Belgium Index (EWK) and iShares MSCI Austria Index (EWO) look as if they're breaking down, says Tate Dwinnell for Self Investors. Year-to-date, EWI is down 1.7%, EWK is down 3.5% and EWO is down 2.1%.

Reasons for the declines vary by country. Unstable politics and slow economic growth, according to economic data from The Economist, are a few factors in Italy's declining performance. In Belgium's case, financials and banks make up more than 50% of its ETF, says Carl Delfeld for ETF XRAY. Considering those areas are the hardest hit by subprime and credit problems, it's no wonder EWK has been pulled down with it. Austria has been hampered with weak domestic consumption that has kept its growth rate below 3%, according to the CIA World Factbook.

European ETFs Blow Past U.S. in Performance

Europe has been kicking our butts lately when it comes to exchange traded funds (ETFs) and their performances. But why? 

One reason could be the new wave of political reform across several European countries, including Germany, Sweden, Belgium and France. The newly-elected, center-right leaning leaders tend to drive bull markets, says Carl Delfeld of ETF XRAY. And although our market has hit new highs, so have the European markets.

In addition, Europe's overall economy has been stronger than ours. Since the end of 2006, Europe's GDP has outpaced America's. The euro is at new highs against the dollar (today it reached $1.38) and the yen. Unemployment is down to 7%, which is the lowest it has been since the euro was created in 1999, according to The Economist.

Every dog has its day; it's only a matter of time before the United States is in the lead again.

• iShares MSCI Germany Index (EWG) - up 29% year-to-date
• iShares MSCI Sweden Index (EWD) - up 21% year-to-date
• iSHares MSCI France Index (EWQ) - up 17% year-to-date
• iShares MSCI Belgium Index (EWK) - up 11% year-to-date

For full disclosure, some of Tom Lydon's clients own EWG.

Belgium ETF-New Changes?

What will happen to the Belgium exchange traded fund (ETF) as voters elected to have a new government after eight years with the current prime minister?  Belgium is made up of the Dutch-speaking region, Flanders, and the French-speaking region, Wallonia.  Flanders is the larger of the two with 60% of the population, so a win in this region is key to success.  Leigh Thomas of Agence France Presse reports Flanders parties are demanding more political powers and want to manage their own employment policy.  Language continues to play a large part in government, because linguistic balance is essential.

How will this effect the iShares MSCI Belgium (EWK)?  The ETF was flat the day after elections, but is down 5% for the past week.  It's difficult to say how much the elections played a role in last week's downturn, as global markets have been dipped a bit.  The top holdings in the account are mostly financial companies, with Fortis at 23.5%. 

For full disclosure, some of Tom Lydon's clients own EWK.