Top Ranked Dutch ETF Unscathed by S&P Downgrade
The Netherlands, one of the six largest economies among the European Union nations, was downgraded by the credit rating agency Standard & Poor on Nov 29, 2013. The rating agency cut its rating for the Netherlands to AA+ from AAA with a stable outlook, citing lackluster future growth opportunities for the country.
Though this European country’s gross domestic product (GDP) rose 10 basis points quarter over quarter in the third quarter of 2013, it fell 60 basis points year over year. Moreover, the rating agency anticipates that the country might require another three years (not before 2017) before its real economic output exceeds 2008 levels.
The rating agency anticipates the Netherlands’ real GDP per capita growth to be around -0.1% till 2016. This compares unfavorably with the economies of its peer countries, which are expected to grow between 0.3% and 1.5%.
Moreover, this fifth largest Euro zone economy is facing housing market issues thanks to falling home prices. Also, weakening consumer confidence, rising unemployment and government spending cuts are impeding the growth prospects of the economy (read: 3 European ETFs Leading the Recovery).
The European Commission forecasts this Dutch economy to contract by 1% this year, a little more than double the projection for the Euro zone contraction.
Following the recent downgrade, only a trio of the 17 countries in the Euro zone – Germany, Finland and Luxembourg – retain a triple AAA rating from all the three major rating agencies (S&P, Moody’s and Fitch) (read: Top Ranked Germany Hedged ETF in Focus).
The Brighter Picture
Let’s not be weighed down by the grim projections though. It is worth noting that the 0.1% sequential GDP expansion marked the first quarterly rise since the second quarter of 2012. The third-quarter growth has brought in new hopes for the Dutch economy, considering that the country is now out of recession.
S&P’s stable outlook for the Dutch economy on the basis of the country’s high GDP per capita, strong external balance sheet, encouraging export performance and a competitive workforce are some of the key positives.
Moreover, the Dutch finance minister, Jeroen Dijsselbloem, sounded confident about the future growth prospects of its economy. He would strive to get the economy’s rating back to AAA on the back of sustained reforms.
The finance minister anticipates that a series of structural reforms including making the labor market “more flexible” and the pension system “more sustainable” might give a boost to the country’s growth prospects. The Dutch government is also working to stimulate the housing market to arrest falling prices (see ETFs for the Most Competitive Countries on Earth).
Economists predict improved economic fundamentals in the Netherlands, with its economy expected to grow above 1% from 2016 onwards.
Moreover, several market experts consider the Netherlands as one of the most competitive economies in the Euro zone. Also, other rating agencies, such as Moody’s and Fitch, have reaffirmed their triple A for the country.
Market Reaction
S&P’s downgrade failed to bring in any significant backlash in the Dutch government bond markets. Moreover, the bonds will still be considered as AAA in many circumstances and will be a part of the European Central Bank’s (:ECB) AAA curve.
Now that the Dutch economy is out of the woods with its housing market believed to have seen its worst, economic fundamentals are expected to improve going forward. If the given trend continues, investors should consider any dip in prices of the top ranked (Zacks ETF Rank #1 Strong Buy) Netherlands ETF as a buying opportunity (Read: 3 Top Ranked Europe ETFs to Buy Now).
iShares MSCI Netherlands ETF (EWN) in Focus
EWN seeks to provide exposure to equities of the Netherlands, which are often overlooked by investors when it comes to Europe ETF investing. Despite the downgrade, the fund fell only around 1%.
EWN holds a small basket of 53 companies that are traded in the Dutch market. Launched in 1996, EWN tracks the performance of the MSCI Netherlands Investable Market and has an asset base of $300.9 million.
The ETF is highly concentrated in its top ten holdings, which together comprise almost 72% of the total securities. Unilever, ING Groep and Koninklijke Philips are its top allocations. The ETF is heavily weighted towards Consumer Staples (28%), Financials (21%), Industrials (17%) and Information Technology (12%) sectors.
The fund charges an expense ratio of 49 basis points and has a dividend yield of 1.35%. With its high quality holdings, this ETF has delivered an excellent return of 31% in the last 1 year (as on 9/30/2013), and is expected to continue the uptrend, especially if Europe remains in turnaround mode.
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