An ETF For Austerity's Poster Child Tops Europe, S&P 500
An exchange-traded fund that tracks Ireland is outpacing every single-country European ETF, the European region and the S&P 500 so far this year. It takes more than the luck of the Irish to pull that off, especially since Ireland is one of the PIIGS, an acronym with a negative connotation that refers to the five euro zone nations considered weaker economically following the financial crisis: Portugal, Italy, Ireland, Greece and Spain.
The iShares MSCI Ireland Capped Index ETF (EIRL) is up 18.6 percent this year. That tops the 7.8 percent for the Vanguard FTSE Europe ETF (VGK) and 17 percent for the SPDR S&P 500 Trust (SPY). It's also about 4 percent more than the second-best performing single-country European ETF. And its 12-month return of 49.2 percent bests VGK's 37.6 percent and SPY's 28.7 percent.
One reason for the upswing is that Ireland took its austerity medicine early on, as its government promptly raised taxes and cut spending as a result of the Eurozone debt crisis. Then, last March, there was strong demand for its first sale of bonds in three years. That put it on track to become the first Eurozone country to leave the bailout program. While still plagued with 14 percent unemployment, the Ireland Department of Finance says gross domestic product is expected to expand 1.3 percent this year and 2.4 percent in 2014.
Many investors may be content with the exposure to Ireland they get in a broad European ETF like VGK, which gives Ireland a 1 percent weighting. After all, Ireland is only 1 percent of Europe’s population. If you want to make a more concentrated bet in Ireland using an ETF, however, EIRL is the only game in town.
The fund differs from other single-country ETFs in tracking large-, mid- and small-cap stocks. Also, while most single-country European ETFs have the financial sector as one of their heaviest weightings, materials, consumer staples and industrials make up about three-fourths of EIRL’s portfolio. It is the only single-country European ETF with less than 10 percent exposure to the financial sector.
The reason for the unusual sector weightings, and another possible reason for outperformance, is that Ireland is one of the most export-heavy economies in Europe -- and the majority of these exports go to non-Euro countries, which helps untie its fate from the rest of Europe. Additionally, the fall in value, or the prospect of a future fall, of the euro against the dollar would benefit Ireland tremendously.
One exporting stock giving this ETF tremendous juice is CRH PLC (CRH:ID), a construction materials company. It’s EIRL’s largest weighting, making up nearly a quarter of the ETF, and is up 25 percent in the past year. CRH gets 44 percent of its revenue from the U.S., whose housing recovery is good news for a company selling construction materials.
Another piston firing inside EIRL is the Smurfit Kappa Group (SKG:ID), a paper and packaging company with a growing emerging markets business. It makes up a much smaller part of the fund, at about 4 percent, but its one-year return of 158.4 percent makes an outsized contribution to the fund's performance.
While those two stocks are responsible for one-fourth of EIRL’s one-year return of 49.2 percent, there are other bright spots in the portfolio. There are big winners from the industrial sector such as Grafton Group PLC (GN5:ID), up 101.5 percent, and AER Lingus Group (AERL:ID), up 85 percent.
EIRL has $57 million in assets, up from $7 million this time last year. It has a reasonable 0.53 percent expense ratio, which is below average for a single-country ETF. It's not very liquid, however -- it trades an average of 23,000 shares a day -- which is why using a limit order is a good idea when buying or selling this ETF.
Eric Balchunas is an exchange-traded fund analyst at Bloomberg. More ETF data is available here.