Guide to Investing in Nordic Countries
Nordic countries have been very successful in combining economic efficiency and growth with a peaceful labor market, fair income distribution, and social cohesion. Despite their high taxes, generous social security, and egalitarian income distribution, the region’s focus on collective risk sharing makes globalization palatable to the public and helps realize the increased productivity and incomes that comes from globalization.
In this article, we will look at how international investors can build exposure to Nordic countries into their portfolios.
Why Invest in the Nordic?
The Nordic region consists of Denmark, Finland, Norway, Sweden, and Iceland, but most investors leave out Iceland due to its smaller size. These countries share a common strategy for combining socialism with capitalism in the form of higher taxes, comprehensive social nets, and a competitive market economy. In the past, this system has been tremendously successful at generating both financial returns and a high quality of life.
Benefits of Investing in the Nordic
- Low Correlation: The Nordic region tends to have a low correlation with the United States equity markets, which means that it provides a higher level of diversification.
- Faster Growth Rates: The Nordic region’s gross domestic product ranges from 1.5 percent to 4.4 percent, which is significantly higher than 1.3 percent in the United States, as of July 2017.
- Attractive Valuations: The Nordic region has lower price-earnings and price-book ratios than the S&P 500, which could translate to a better value for investors.
Drawbacks to Investing in the Nordic
- Lower Total Returns: The S&P 500 SPDR (SPY) has risen nearly 120 percent compared to less than 50 percent for the Global X Nordic Region ETF (GXF) since 2010.
- Higher Taxes: Nordic countries are characterized by high taxes and big social nets, which may constrain growth as the population ages.
- Greater Expenses: Many Nordic ETFs and mutual funds have higher expense ratios than their domestic counterparts.
Brief Country Overviews
Sweden is an export-focused economy focused on machinery, motor vehicles, paper production, pharmaceuticals, and military armaments. The country’s largest trading partners include Germany (11 percent), the United Kingdom (7.7 percent), Denmark (7.3 percent), and the United States (6.4 percent). With a perfect credit rating and 41.4 percent debt-to-GDP, the country remains on the solid financial footing and prepared to weather any financial storm.
Norway’s economy has been historically focused on shipping and natural resources like crude oil, hydroelectric power, and fisheries. Unlike Sweden, Norway has always relied upon the North Sea oil reserves to maintain its economic strength. The country also has a perfect credit rating and a 30.3 percent debt-to-GDP ratio that suggests that it remains on solid financial footing compared to many other countries across Europe.
Finland’s economy is primarily service-based with about 30 percent of its GDP coming from manufacturing and refining activities. With a slightly higher debt-to-GDP ratio of 57 percent, the economy has a nearly perfect credit rating with the exception of the Standard & Poor’s T&C Assessment where it has an AA+ rating. It’s also the only Nordic country that joined the Eurozone and currently uses the euro currency.
Denmark’s economy is focused on both services and manufacturing along with mature oil and gas production in the North Sea. With one of the lowest inequality scores in the world, the country’s economy operates through a series of cooperatives and foundations rather than conventional corporations. The country also has a perfect credit rating with a 44.5 percent debt-to-GDP ratio that provides solid financial footing.
How to Invest in the Region
The Global X FTSE Nordic Region ETF (GXF) holds a diversified portfolio consisting of the 30 largest publicly-traded companies in Sweden, Norway, Finland, and Denmark. The financial sector has the greatest exposure with 32 percent of the portfolio, while industrials, health care, and information technology hold the next three largest positions. With a 0.51 percent expense ratio, the fund is costlier than many domestic funds, but on par with other regional ETFs.
The Fidelity® Nordic Fund (FNORX) is a mutual fund that holds assets in Sweden, Norway, Finland, and Denmark. The fund’s objective is holding up to 35 percent of total assets in any industry that accounts for more than 20 percent of the regional economy while using fundamental analysis and economic conditions to select specific investments. With a 0.98 percent expense ratio, the fund is cheaper than other mutual funds but more than the Global X ETF.
International investors may also want to consider ADRs to invest in these countries. The easiest way to find these opportunities is by looking at the prospectus of Nordic ETFs or mutual funds to find the largest or most promising companies. The primary drawback is that investors must conduct their own due diligence on each company, build their portfolio with individual positions, and ensure that it’s rebalanced over time.
The Bottom Line
Nordic countries have developed a strong reputation over the years for their balance between socialism and capitalism. Despite their high taxes and social nets, these countries have remained competitive on a global basis and provided strong returns to investors. International investors may want to take a closer look at the region as an opportunity to diversify their portfolio into an area that remains economically robust.