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Mamma Mia: Another Country ETF Could Contend With Rate Hikes

ETF Professor

The “Mamma Mia” sequel recently premiered and with ABBA receiving renewed attention, perhaps it's time for similar treatment of the iShares MSCI Sweden ETF (NYSE: EWD).

EWD, which is more than 22 years old, tracks the MSCI Sweden 25/50 Index and is down more than 7 percent year-to-date.

What To Know

EWD, the only U.S.-listed exchange traded fund dedicated to Swedish stocks, is disappointing this year. The fund's year-to-date loss is more than triple that of the S&P Europe 350 Index, in which Sweden is the seventh-largest country weight.

EWD is also by far the worst performer among comparable single-country ETFs, including the equivalent Denmark, Finland and Norway funds.

Now, Swedish stocks must contend with the specter of the Riksbank, the world's oldest central bank, potentially increasing borrowing costs.

Why It's Important

“As expected the Swedish Riksbank executive board voted to maintain interest rates, at the beginning of July,” said Markit in a recent note. “However, the tone of the Riksbank discussion had clearly evolved compared to April's meeting. Board members highlighted stronger than anticipated inflation, extremely high volatility in FX markets, and the emergent housing bubble; as reasons to revise monetary policy.”

Sweden is an export-driven economy, so there could be a pinch on local stocks if the krona strengthens at the hands of tighter monetary policy. EWD, which doesn't hedge currency risk, holds 32 stocks. Over 44 percent of the fund is allocated to the export-heavy industrial and technology sectors.

What's Next

Some signs point to Sweden seeing higher interest rates before the end of this year. The country currently has negative interest rates.

“Two board members advocated for raising rates before the December meeting,” said Markit. “Henry Ohlsson recommend raising the repo rate to -0.25% immediately, whilst Martin Flodén advocated moving to -0.25% at either September or October's meeting.”

Riksbank is aiming for 2 percent inflation this year, a level that could be topped, potentially paving the way for a move to more normalized interest rate policy.

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