Use ETFs To Bet On Low Debt Europe

By Aaron Levitt | February 24, 2012 AAA

The recent approved bailout deal may have allowed Greece to win this round and stay afloat for a little while longer, but the country is still in trouble. High debt loads continue to plague a variety of developed nations across the continent and monetary union. Concerns still linger with the remaining PIIGS and various austerity programs have the potential to unhinge the region's fragile economy. However, not all Europe is drowning in a quagmire of debt. There are plenty of low debt options throughout the nation that grow and prosper as their neighbors suffer in the face of these high debt loads. For investors, betting on the nations with more "wiggle room" could be the best long term way to play Europe.

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6% Debt-to-GDP
Contrary to the headlines, Europe isn't all falling into insolvency and default. Certainly, there are plenty of nations with high debt-to-GDP ratios that will see sub-par economic growth for years to come. More tax revenues will have to go to servicing that debt and with slowing economic growth, that job becomes more difficult. Even white knight Germany isn't in the best financial shape, with a current debt-to-GDP ratio around 82%. However, paying for all of these expensive bailouts will certainly cramp the German economy.

In the midst of high-debt Europe, there are plenty of other nations that have their financial houses in order. According to the International Monetary Fund (IMF), Estonia currently has a debt-to-GDP ratio of just 6% and unlike many nations that number is dropping; by 2016 it will be a low 4.5%. Bulgaria's public debt sits at just 17% and BRIC superstar Russia's is a mere 11%. It's not just emerging Europe that is in the low debt camp. The Nordic nations of Norway, Sweden, Denmark and Finland, all have debt-to-GDP ratios around or below 55%. Major exporting powerhouses, like Switzerland and the Netherlands have ratios of 52 and 65%, respectively.

For investors, there is a real reason to pay attention to low debtor nations. A paper published by the Bank for International Settlements shows that when debt reaches 80 to 100% of GDP for governments, 90% of GDP for corporations, and 85% of GDP for households, it has the power to choke economies. The reason: too much time and purchasing power is spent servicing these debts instead of growing the economy. Lead author on the paper, Stephen Cecchetti wrote "The debt problems facing advanced economies are even worse than we thought." The take-away lesson is that high debtor nations will ultimately grow slower than their unhindered sisters. (For related reading, see Economic Indicators: Gross Domestic Product.)

Playing the Low Debtors
Given that nations like Portugal have a combined debt-to-GDP ratio of around 363%, investors may want to avoid broad-based European funds like the SPDR EURO STOXX 50 (ARCA:FEZ) and focus on the low debtor nations. The ETF boom has made it possible to do just that.

Scandinavia's stronger economies highlight stable tax and fiscal policies compared with other parts of Europe. Despite their small size, the Nordic nations have a lot going for them in terms of investment merit, including strength in high-engineered goods exports and value-added industrial components. The Global X FTSE Nordic Region ETF (ARCA:GXF) tracks 30 different firms including Novo Nordisk (NYSE:NVO) and SeaDrill (NYSE:SDRL) and can be used as proxy for the region. Similarly, energy rich Norway continues to be major exporter to emerging nations, and Sweden represents the big boy on the block. Both use their own currencies and can be played via the iShares MSCI Sweden (ARCA:EWD) and iShares MSCI Norway. (For more information, see Investing In Scandinavia.)

Emerging Europe offers investors the chance to bet on the future. Taxes and wages are relatively low compared to the rest of developed Europe, and the availability of skilled workers is high. Foreign direct investment continues to grow and a dearth of commodity resources are available in several nations. While not all emerging Europe is low debt (Hungary for example), the bulk of the area is. The SPDR S&P Emerging Europe (ARCA:GUR) offers a broad way to gain access to the region. The fund is Russian and Polish heavy, but these nations feature low debt-GDP-ratios.

The Bottom Line
Despite the recent Greek bailout, problems still exist for a variety of nations on the continent. High debt-to-GDP ratios will ultimately result in slower future economic growth. For investors, betting on the low debtor nations might be the best way to access the region. The previous picks along with the iShares MSCI Netherlands (ARCA:EWN) make ideal ways to do just that. (To learn more, check out How To Pick The Best ETF.)

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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