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.