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The Global X FTSE Nordic Region ETF: The Perfect Fit

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. (click to enlarge) 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. (click to enlarge) 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) OTC: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 OTC: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 OTC: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 OTC: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 OTC: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. (click to enlarge) 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. 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.

The iShares MSCI Denmark Capped ETF: Happy In EDEN

Denmark’s Krone is considered a ‘safe-haven’ currency. Although a small economy, Denmark is home to several world class companies. The well-established international companies have yet to reach full dividend return potential. Historians often classify long stretches of time as ‘an age’. For example, ‘Ice Age’, ‘Stone Age’, ‘Bronze Age’ and ‘Industrial Age’. Today, it’s as though we’re living in the ‘Information Age’. There seems to be no end to the collection and analyzation of data in every imaginable way. One such collation of data stands out: the World Happiness Report . It’s a landmark survey of the state of national happiness. On a scale of 0 to 10, four countries are virtually tied for first place with an average score between 7.5 and 7.6. They are Switzerland, Iceland, Denmark and Norway. So if your portfolio has you feeling a bit glum, it just so happens that there’s a way to share in the happiness. BlackRock’s iShares MSCI Denmark Capped ETF (BATS: EDEN ), just might cheer you up! Before getting a closer look at Denmark and the fund, it best to make clear why the fund is called ‘capped’. It’s simply means that the fund complies with specific IRS requirements which; …limits the weight of any single component to a maximum of 25% of the Underlying Index. Additionally, the sum of components that individually constitute more than 5% of the weight of the Underlying Index cannot exceed a maximum of 50% of the weight of the Underlying Index in the aggregate… Also, the fund is designed to emulate the Morgan Stanley Capital International [MSCI] Danish Stock Exchange Index, is 99.58% invested in Danish listed companies and is passively managed. (click to enlarge) According to the Official Website of Denmark , the northern European nation has some very unique characteristics. For instance, aside from the mainland peninsula (called Jutland ), Denmark includes 406 islands totaling over 4544 miles of coastline. Its geographic mainland is nearly flat, the highest point being a mere 558 feet above sea level. Surprisingly, the Kingdom of Denmark spans a bit further than one might expect. Greenland , although geographically a part of North America belongs to the Kingdom of Denmark, as well as the Faroe Islands midway between Scotland and Iceland. (These outlying regions of Denmark do have completely autonomous governments.) Closer to home, Denmark’s government is a constitutional monarchy, parliamentary in structure and almost always governed by minority consensus. In fact, no single party has held a majority in the Danish Parliament for well over 100 years! Denmark has been a member of the European Union since 1973. Although the Danes still use the traditional Krone, Denmark participates in the European Union’s ‘Exchange Rate Mechanism II’. ERMII requires that EU members who wish to transition to the Euro, maintain their legacy currency within a fixed band, ±15%, of a central rate. Danmark’s Nationalbank , the central bank of Denmark, has gone to great lengths to keep the Krone within an even narrower ±2.5% range. Because of Denmark’s well managed and stable economy the Danish Krone is considered one of the world’s ‘safe haven’ currencies. So much so, the central bank has kept its base deposit rates below zero to discourage ‘a flood’ of capital inflows which would strengthen the Krone and depress Denmark’s export economy. The point being is that Denmark’s reputation as a financial safe haven is on par with that of Switzerland, or the U.K. or even the U.S. However, if one were trying to think of a single global export product that would immediately bring Denmark to mind, nothing particularly stands out. So then, what makes the Danish economy special? Of the 28 nation European Union, Danes are 6th in per capita GDP; have a real GDP growth rate of 1.1%, below the EU-28 average of 1.4%; Government debt of about 45% of GDP, well below the EU-28 average; an inflation rate half of the EU-28 and a labor productivity well above the EU 28 average. It’s also important to note that although taxes are well above the EU-28 average, so too are government expenditures on social services. In relation to the EU, Denmark has above average wealth, a productive workforce and a high standard of living underwritten by taxes supporting an extensive social services network, including tax supported healthcare and education. Almost 80% of Denmark’s total exports are destined for its top 20 export partners. Chief among those destinations are Denmark’s fellow European Union member nations. Data from Observatory of Economic Complexity It’s similar for import originations; the Lion’s share of imports originating from EU partners. Data from Observatory of Economic Complexity Hence, it seems that Denmark is an integral part of the European Union’s economy and on track towards becoming a Eurozone member. In order to best understand what drives the economy, it’s best to examine the holdings of the iShares Denmark Capped fund, starting with the way iShares allocates investment capital among the various market sectors. Data from iShares The non-cyclical sectors, Health Care and Consumer Staples, tally up to about 41%; the cyclicals, Financials, Materials and Consumer Discretionary compose about 31% and the cyclically sensitive sectors, Industrials, Telecom and IT comprise about 28% of the fund. Lastly, the cash holding are mostly U.S. Dollars and a small portion of Danish Krone. The fund itself is not large with a mere 39 holdings as of the end of October. Hence it isn’t too much trouble to take a look at the holdings of each sector, examining a few common metrics. The fund’s Health Care sector holds 9 companies, most notably the global pharmaceutical giant Novo Nordisk (NYSE: NVO ) tipping the scale at 22.0906% of the fund’s total holding. However, Coloplast ( CLPBY), a provider of specialized gastro-intestinal consumer and hospital products and biotech Genmab ( OTCPK:GMXAY ) are lesser known but top of the line as far as Health Care companies go. In general, the fund’s Health Care sector pulls together a respectable lineup, although the sector’s average dividend yield is a disappointing 0.639% with, however, a dependable average payout ratio of almost 25%. These are solid companies with good fundaments, with the potential for higher distributions. Health Care 34.80% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business Novo Nordisk NVO 22.0906% $109.95 1.43% 41.30% 30.08 23.90 0.87 Pharmaceuticals Coloplast CLPBY 3.5638% $16.5403 2.44% 106.77% 32.90 17.92 0.50 Personal Health Care Products and Service Genmab GMXAY 2.7752% $5.870 0.00% 0.00% 84.98 14.20 0.99 Co-Development Biotech, Antibody Therapeutics with Glaxo (NYSE: GSK ), Roche (OTCQX: RHHBF ) GN Store Nord OTCPK:GNNDY 1.6894% $3.141 0.69% 21.76% 30.33 3.64 1.04 Hearing Aids, Hands Free Communications; Beltone and ReSound Brands Bavarian Nordic OTCPK:BVNRY 1.3398% $1.131 0.00% 0.00% 40.91 5.67 1.53 Biotech Vaccines for Cancer and Infectious Disease William Demant Holdings OTC:WILLF 1.2814% $4.823 0.00% 0.00% 24.03 5.53 0.74 Holding Company for Hearing Aid Device Manufactures; Diagnostic Instruments ALK-Abello OTCPK:AKABY 0.729% $1.019 0.67% 27.57% 39.86 2.92 0.32 Allergy Treatment, Prevention, Diagnosis Zealand Pharma OTCPK:ZLDPF 0.6916% $0.533 0.00 0.00% NA 21.64 1.01 Biopharmaceuticals Peptides and Cardio-Metabolic AMBU Copenhagen: AMBUb 0.6397% $1.101 0.52% 26.32% 51.58 8.85 0.05 Life Support Devices, Anesthesia Equipment, Monitoring Devices Data from Reuters The Financial Sector is in large part the international Danske Bank ( OTCPK:DNSKY ) at 7.8049% of the fund’s Financial sector and is by far Denmark’s largest bank with a respectable market cap of $27.785 billion in U.S. Dollars. The sector’s average dividend is a reasonable at 2.04% and the average payout ratio of the five dividend paying companies is well sustainable at approximately 43.87%. Financials 15.73% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business Danske Bank DNSKY 7.8049% $27.785 2.95% 33.55% 30.37 1.24 1.22 International; Nordic Regional Jyske Bank OTC:JYSKY 1.8923% $4.648 0.00% 0.00% 18.33 1.08 1.09 International; North Europe TopDanmark OTCPK:TPDKY 1.5684% $2.801 0.00% 0.00% 15.19 3.62 0.25 Insurance and Pension Funds Sydbank OTCPK:SYANY 1.5644% $2.447 3.17% 47.12% of cash flow 15.28 1.46 0.77 Denmark and Germany TRYG OTC:TGVSF 1.3619% $5.218 4.43% 93.57% 18.77 3.76 0.19 Nordic region Insurance ALM Brand Copenhagen: ALMB 0.836 $0.986 1.30% 22.14 16.61 1.30 1.25 Insurance and Financial Services Spar Nord Bank Copenhagen: SPNO 0.6974% $1.205 2.46% 22.96% of cash flow 10.08 1.13 0.84 Retail and Small Business Data from Reuters The fund’s Industrial Sector accounts for 11 of the fund’s holdings, led by the well know Vestas Wind Systems ( OTCPK:VWSYF ) at almost 5% of the fund. It’s worth noting here that Denmark has an average wind speed of nearly 17 miles per hour; well suited for wind energy generation. Second to Vestas in fund industrial weightings is the shipping giant Moller-Maersk [Copenhagen: MAERSKb] at 4.4241% of B shares and 2.451% of the [Copenhagen: MAERSKa] of class A shares. The sector’s average return, when including the oversized Moller-Maersk 19% class A share dividend, is just over 3% and without it, its 1.43%. Denmark has ample access to the sea and as one might expect, four of its industrial holdings are international freight shipping and transportation companies. Industrials 24.24% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business Vestas Wind Systems VWSYF 4.9908% $13.130 0.98% 24.32% 24.75 4.56 1.03 Wind Energy Systems, Service and Finance A P Moller Maersk B shares Copenhagen: MAERSKb 4.4241% $31.31 3.00% 16.65% of Cash Flow per Share 19.15 1.04 NA Marine Shipping DSV OTCPK:DSDVY 3.8309% $7.238 0.57% 15.18% 25.75 7.41 0.67 Air, Sea, Land Freight Transportation ISS OTCPK:ISSJY 2.4673% $6.541 2.05 0.00% 19.48 3.26 NA Building/ Factory Maintenance A P Moller Maersk A shares Copenhagen: MAERSKa 2.451% $31.31 19.71% 25.50% 7.57 0.84 1.13 Marine Shipping DFDS Copenhagen: DFDS 1.3245% $1.871 1.75% 38.08% 21.19 2.05 0.32 Shipping and Logistics Flsmidth & CO OTCPK:FLIDY 1.0991% $1.923 3.54% 56.70% 15.30 1.52 1.36 Cement & Mineral Processing Machinery NKT Holdings OTC:NRKBF 1.0559% $1.325 1.08% 311.73% 285.23 1.50 1.53 Industrial Power Cables Rockwool International OTC:RKWBF 0.955% $3.424 1.07% 27.46% 28.09 2.25 0.92 Manufacturer of Stone Wool Insulation Per Aarsleff Copenhagen: PAALB 0.6813% $0.708 0.67% 9.02% 13.35 2.13 0.56 Construction, Pilings and Pipe Solar Copenhagen: SOLARb 0.5605% $0.423 1.72% NA NA 1.78 0.87 HVAC Equipment and Supplies Norden OTC:DPBSF 0.3984% $0.843 0.00% 0.00% NA 0.66 0.69 Shipping Dry Cargo/ Tankers Data from Reuters Denmark’s economy seems to lean towards Health Care, Biotech, Chemicals and Pharmaceuticals in general. So it’s no surprise to find to that the two holdings in the materials sector are ‘bio-materials’ manufacturers. It’s worth a quick mention since they are interesting companies. Novozymes ( OTCPK:NVZMY ) manufactures industrial enzymes, microorganisms ingredients and biopharmaceutical ingredients. The applications range from household cleaning products, food and beverage ingredients, agriculture, feed products, and aquaculture feed products. Chr Hansen ( OTCPK:CRTSF ) is a holding company for its ‘Cultures and Enzymes’, Health and Nutrition and Natural Colors divisions. The sector average dividend yield is 1.855% with an average payout ratio of 40.25%. Materials 7.67% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business Novozymes NVZMY 4.7194% $12.043 0.95% 33.83 35.71 8.63 0.63 Biotech Chemicals, Enzymes Hansen Holdings CRTSF 2.9513% $7.939 2.76% 50.46 44.79 11.85 0.36 Bioscience: Food, Ag and Pharma The Consumer Discretionary has what might be expected, with one exception: the world renowned speaker and sound reproduction equipment manufacture Bang & Olufsen ( OTCPK:BGOUF ) . Bang and Olufsen sound system and components have long been ‘top-of-the-line’ equipment for home, auto and professional entertainment consumers. For example, these are the sound systems used by Mercedes-Benz ( OTCPK:DDAIY ) , Aston Martin (owned by Ford (NYSE: F )) , Audi ( OTCPK:AUDVF ) and BMW ( OTCPK:BAMXY ) . Perhaps a secret to their success is quality over quantity. The company’s market cap is less than one-quarter billion U.S. Dollars and there’s no dividend. The entire sector’s average dividend is a bit over 2.00% and average payout ratio for the three other holdings is a bit over a well sustainable 48%. Consumer Discretionary 7.38% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business Pandora OTCPK:PNDZF 5.7066% $14.135 1.15% 35.97 31.91 16.05 2.10 Accessories and Jewelry Matas OTC:MAASF 0.6221% $0.731 4.72% 65.86 14.87 1.99 NA Personal Care, Cosmetics, Vitamins IC GROUP Copenhagen: IC 0.5752% $0.470 2.14% 44.16 20.00 3.51 0.90 Clothing and Sportswear Bang & Olufsen BGOUF 0.4804 $0.285 0.00 0.00 NA 1.05 1.00 Multimedia, Sound Systems Data from Reuters According the official website of Denmark , beer has been part of Danish culture for more than 5000 years. Denmark is proud of its brewing industry. The first brewing guild was established in the 16 century. It is estimated that there are over 200 ‘microbreweries’ as well as world renowned brands such as Tuborg and Carlsberg ( CAGBY) . So again, it’s no surprise that two of the three Consumer Staples are breweries, Carlsberg and Royal Unibrew [Copenhagen: RBREW] both having a global reach for beer as well as soft drinks. The third holding is Schouw ( OTC:SUWCF ) , manufacturer of casual and active wear. The average dividend for Consumer Staples is 2.13% with an approximate payout ratio of 37%. Consumer Staples 6.15% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business Carlsberg CAGBY 3.8326% $12.738 1.62% 15.98% of Cash Flow 22.53 1.49 1.16 Beer & Soft Drinks Royal Unibrew Copenhagen: RBREW 1.4151 $2.2 2.53% 55.48 21.93 5.40 0.59 Beer & Soft Drinks Schouw & Co. SUWCF 0.9048% $1.337 2.25% 39.42 16.28 1.32 0.70 Diversified Consumer Non-Cyclical Data from Reuters The two remaining sectors include Telecom holding TDC ( OTC:TDCAY ) , a diversified communications and content provider and IT holding Simcorp ( OTC:SICRY ) , specializing in financial industry software solutions. Telecom 2.00% and IT 1.61% Symbol Fund Weighting Market Cap ( USD Billions ) Yield Payout Ratio Price/ Earnings Price/ Book Beta Primary Business TDC (Telecom) TDCAY 2.0068% $4.264 5.63% 11.14% of Cash Flow 12.98 1.12 0.51 Communications and Entertainment Simcorp (IT) SICRY 1.605% $2.038 1.35% 53.84 40.11 27.85 0.57 Financial Industry Software Data from Reuters As for the fund itself, it has been listed since January 2012 and currently trades at a discount of -0.20% to NAV. The fund has a P/E of 23.47 and a price to book multiple of 2.89. The annualized distribution is 3.09% and the trailing 12 month yield is 1.54%. The shares are lightly traded with a 20 day average volume of just over 17,000 shares per day. Since inception the fund has returned 22.64% and over the past 52 weeks 8.83%. (click to enlarge) Denmark is a small country with a relatively small industry. The country is currently ranked 139th by the U.S. EIA and does have a small but active refining industry, hence the potential for Denmark to expand its industrial base sometime in the future. Also note that with untapped oil reserves together with its expanding reliance on wind energy and a decades long national energy conservation program makes Denmark virtually energy independent. Lastly, Danmark’s National Bank has gone to extraordinary efforts to keep its currency on track for Euro adoption. For a nation as small and productive as Denmark, being an integral part of the larger Eurozone economy will be very beneficial. The ETF has had a nice run since inception. The investor might expect some kind of retracement should the European economy slow further. That would be a buying opportunity. For investors with a fair amount of patience, who seek capital appreciation as well as the high potential for increasing sustainable dividend returns and single country focus should make the investors who invest in ‘EDEN’, happy in the long run.

Building A Hedged Portfolio Around A Position In Novo Nordisk

Summary One of the more appealing stocks to consider as part of a concentrated portfolio is Novo Nordisk, the leading diabetes care and biopharmaceutical company. We review some reasons why Novo Nordisk is appealing, and discuss how an investor can include it in a concentrated portfolio, while limiting his risk and maximizing expected return. We recap the method, show how you can build a concentrated hedged portfolio yourself, and present a sample hedged portfolio built around Novo Nordisk. The sample portfolio is designed for someone with $80,000 to invest, who wants to limit his risk to a drawdown of no more than 18%. The sample portfolio has a negative hedging cost. The Number One Stock In the World Part of the attraction of Seeking Alpha articles is often the comments they generate. In the latest installment of his series on his top investments (“The #1 Stock In the World, Part II”), hedge fund manager and Seeking Alpha contributor Chris DeMuth, Jr. named Ocean Shore (OCSH) as his current favorite. In a comment on that article, his fellow Seeking Alpha contributor Harm Elderman offered an intriguing alternative selection for that title, Novo Nordisk (NYSE: NVO ), and added: “It’s been my largest share of my portfolio for over 8 years and every year it’s been an incredible cash cow (as it has been all the years before and will be in the future). Seriously, take a look. This firm has bent some stock market rules (in my view) over the last 25 years in regards of risk/reward profile.” The Appeal of NVO Although DeMuth aims to “sift the world”, it’s understandable that he can’t cover every promising stock. At the same time, a closer look at NVO illuminates the appeal it has had for Elderman and many other investors. (click to enlarge) Riding a global mega trend Although Novo Nordisk is active in other areas such as growth hormone treatments, it remains a leading manufacturer of diabetes medications, such as the NovoLog FlexPen prefilled insulin syringe, pictured above. Diabetes is a global epidemic: according to the World Health Organizaton, as of 2014, 9% of the world’s adult population was estimated to suffer from the disease. The International Diabetes Foundation’s Diabetes Atlas estimates the total number of diabetes cases globally is 387 million. By way of comparison, the WHO estimates there are 37 million patients in the world living with HIV. The scale of the diabetes epidemic, and Novo Nordisk’s 90-year history in diabetes treatment, provides some context to the remarkable long-term chart of the company’s shares: (click to enlarge) Not only does the scale of diabetes dwarf that of HIV and AIDS (fewer than half of those infected with HIV currently suffer from AIDS), but the epidemic is expected to grow considerably over the next two decades. The Diabetes Atlas estimates 592 million people will be living with the disease in 2035. Selected Fundamentals Novo Nordisk shares aren’t cheap on an absolute basis – according to Fidelity’s data, the current PEG ratio for the stock (using 5-year earnings growth projections) is 1.97, while a PEG ratio of 2 or greater is often considered to be high. However, the average PEG ratio for the pharmaceutical industry is 4.13. Particularly striking, though, are the company’s returns on sales, equity, assets, and investment, as shown below (image via Fidelity). (click to enlarge) Equity Summary Score Fidelity aggregates opinions on stocks from multiple research shops and weights each opinion by the historical accuracy of the researchers. It then consolidates that data into an “equity summary score”, on a scale from 1 to 10, with 10 being the most bullish. As the image below shows, the current equity summary score for NVO is very bullish. Building a Hedged Portfolio Around an NVO Position Given the appeal of NVO, why consider hedging it? For two reasons: Any stock may be subject to unpredictable, idiosyncratic risk. For a recent example , consider the emissions scandal at Volkswagen ( OTCQX:VLKAY ). All stocks are subject to market risk: in the event of a major market correction, all stocks are likely to plummet. You could simply buy and hedge NVO, and we’ll show a sample hedge for it below, but the benefits of the hedged portfolio method are that it can lower your overall hedging cost and let you maximize your expected return. So, we’ll use NVO as starting point and show how you can build a hedged portfolio around it for an investor who is unwilling to risk a drawdown of more than 18%, and has $80,000 that he wants to invest. First, though, let’s address the issue of risk tolerance, and how it affects potential return. Risk Tolerance and Potential Return All else equal, with a hedged portfolio, the greater an investor’s risk tolerance, the greater the maximum drawdown he is willing to risk (his “threshold”, in our terminology) and the higher his potential return will be. So, we should expect that an investor who is willing to risk a 28% decline will have a chance at higher potential returns than one who is only willing to risk an 8% drawdown. In our example, we’ll be splitting the difference and using an 18% threshold. Constructing A Hedged Portfolio We’ll outline the process here briefly, and then explain how you can implement it yourself. Finally, we’ll present an example of a hedged portfolio that was constructed this way with an automated tool. The process, in broad strokes, is this: Find securities with promising potential returns (we define potential return as a high-end, bullish estimate of how the security will perform). Find securities that are relatively inexpensive to hedge. Buy a handful of securities that score well on the first two criteria; in other words, buy a handful of securities with high potential returns net of their hedging costs (or, ones with high net potential returns). Hedge them. The potential benefits of this approach are twofold: If you are successful at the first step (finding securities with high potential returns), and you hold a concentrated portfolio of them, your portfolios should generate decent returns over time. If you are hedged, and your return estimates are completely wrong, on occasion – or the market moves against you – your downside will be strictly limited. How to Implement This Approach Finding promising stocks In this case, we’ve got one promising stock already, NVO. To find others, you can use Seeking Alpha Pro , among other sources. To quantify potential returns for these stocks, you can use analysts’ consensus price targets for them, to calculate potential returns in percentage terms. For example, via Nasdaq’s website , the image below shows the sell-side analysts’ consensus 12 month price target for NVO as of October 9th, 2015: Since NVO closed at $54.61 on October 9th, the consensus price target suggests a 16.4% potential return over 12 months. In general, though, you’ll need to use the same time frame for each of your potential return calculations to facilitate comparisons of potential returns, hedging costs, and net potential returns. Our method starts with calculations of six-month potential returns. Finding inexpensive ways to hedge these securities Whatever hedging method you use, for this example, you’d want to make sure that each security is hedged against a greater-than-18% decline over the timeframe covered by your potential return calculations (our method attempts to find optimal static hedges using collars as well as protective puts going out approximately six months). And you’ll need to calculate your cost of hedging as a percentage of position value. Select the securities with highest, or at least positive, net potential returns When starting from a large universe of securities, you’d want to select the ones with the highest potential returns, net of hedging costs, but, at a minimum, you’d want to at least want to exclude any security that has a negative potential return net of hedging costs. It doesn’t make sense to pay X to hedge a stock if you estimate the stock will return