A Possible Housing Bubble For A Surprising ETF

Talk of housing bubbles in various corners of the world has gained steam since the global financial crisis. Europe has not been immune as Spain, just one example, has endured significant damage to its economy following a housing bubble. Investors have felt the pain. While the iShares MSCI Spain Index Fund (NYSEArca: EWP) is up 36.3% in the past 12 months, the lone Spain ETF is still down more than 49% over the past five years.

Europe’s housing mess is not over and the country with perhaps the worst looming residential real estate problem might surprise some investors. That is right, previously sturdy Sweden is flirting with a housing a disaster. The iShares MSCI Sweden Index Fund (NYSEArca: EWD) is only showing slight signs of being affected by the notion of housing bubble. EWD is down slightly in the past month, but the ETF is clinging to a 7.1% year-to-date gain. [Sweden ETF Takes A Tumble]

EWD and other Nordic ETFs such as the Global X FTSE Norway 30 ETF (NYSEArca: NORW) rose to acclaim at the height of the European sovereign debt crisis because, excluding Finland, the Nordic countries do not use the euro. While the Scandinavian nations are developed markets and with that comes sluggish rates of growth, the region is also home to multiple AAA credit ratings, a trait that increased the allure of ETFs like EWD in recent years. [ETF Chart Of The Day: Norway]

However, there are risks for EWD. Last month, Sweden boosted its risk-weights on mortgages to 15% in an effort to cool rising home prices and a build-up in debt. That debt has surged to a record 174% of disposable incomes this year from about 90% in the 1990s, reports Johan Carlstrom for Bloomberg, citing data from Sweden’s central bank.

Last week, the International Monetary Fund said Sweden should raise the risk-weights on mortgages to 35%. EWD could be vulnerable in the event of housing price declines. If home prices in Sweden slump 20% over three years, the country’s four largest banks could incur $3.2 billion in combined losses, according to Bloomberg. EWD allocates almost 30% of its weight to the financial services sector. Three of Sweden’s four largest banks are found among the ETF’s top-10 holdings.

Swedish banks are already grappling with a dire scenario, that being that Swedes repay their mortgages so slowly that they are planning to do an average of 140 years, according to Mike Shedlock.