EIRL - EIRL: The Key Reasons I Own This Irish ETF

2023-03-30 14:37:00 ET

Summary

• EIRL is an Ireland-specific ETF that has performed well over the past year. This suggests a reasonable hedge against US/developed world equities.
• The fund is very top heavy but in two areas that I want exposure to. The first is online sports betting, where FanDuel is a leading brand in the US.
• Materials exposure also dominates this fund, but that remains a smart way to guard against ever-persistent inflation across the globe.

Main Thesis & Background

The purpose of this article is to evaluate the iShares MSCI Ireland ETF (EIRL) as an investment option. This fund is a country-specific ETF that "seeks to track the investment results of a broad-based index composed of Irish equities" and is my primary way for owning exposure to the Emerald Isle.

This is a fund I have owned for a while, ever since the New Ireland Fund (IRL) was closed down by management. Over time, EIRL has served me quite well, especially over the past year. While my U.S. positions in the S&P 500 floundered, EIRL offered strong gains:

As you can see, this performance divergence has continued through the start of Q1 2023 as well. That is central to why I thought a review on EIRL was timely now. I took into consideration this recent performance and how likely it is to continue going forward.

To manage expectations, another double-digit pop in a year will probably be harder to come by. Still, I see the potential for more gains ahead and view the potential for a hedge on my US-centric exposure as just as warranted as ever. Therefore, I believe a "buy" rating should stick, and will explain why below.

Ireland's Remoteness, Recent Growth Are Positives

To start, I want to focus on a couple of key macro-reasons for liking Irish economic exposure. I will dive in to the specifics behind EIRL and the top holdings of the fund in this review, but this section will illustrate why I even considered Ireland in the first place.

First, I like the island's remoteness with respect to the EU-zone and its lack of land borders with the rest of Europe. This is also central to why I invest in Britain through the iShares MSCI United Kingdom ETF (EWU). I view this positively for two reasons. One, it helps to provide a natural hedge against what is going on in other countries. Two, expanding on the first point, this is critical at a time when there is an ongoing war in Europe. While central European equities are performing extremely well in 2023 so far, I see this as short-sighted. I view the Russian-Ukrainian conflict as a prolonged struggle that is only going to escalate with time. This is going to wreak havoc on the country, limit growth opportunities, and put investors in a difficult position.

Second, Ireland has been seeing stronger growth (albeit not "strong") than its EU counterparts. In Q4, many nations in Europe saw negative growth, while Ireland was one of the cohort that saw positive quarter-over-quarter growth:

This is not meant to over-excite, but the fact is that positive growth at this point in time is nothing to shrug our shoulders at. The globe continues to grapple with geopolitical instability, persistent inflation, and a rebuilding of supply chains. To see Ireland outperform the EU-zone in economic growth terms suggests to me this is a country worth considering at the very least.

This Is Actually A Big Sports Betting Play

One interesting item straightaway for EIRL is that it actually offers investors quite a bit of sports betting exposure. That may sound off, since Ireland isn't necessarily known for being a gaming leader or betting destination. While true in some respects, the country's favorable tax status is likely a key factor as to why Flutter Entertainment (PDYPY) is headquartered in Dublin. American residents are likely aware of the company's branding here in the U.S. under FanDuel, but that is just one of many brands the company owns. Top brands include Paddy Power, Betfair and Sportsbet brands, which are the number one operators in the United Kingdom, Ireland and Australia, respectively.

Before I dig in to why I like this exposure, consider that if one wants to buy this fund, they better be a Flutter bull. That is because this particular holding is the second largest by weighting, clocking in over 22% of total fund assets:

Suffice to say, if you don't agree with my thesis there, this fund probably is not for you.

So, this begs the question- why do I like Flutter? It primarily comes down to my very positive opinion of the online sports betting industry as a whole and, in particular, the growing market share of FanDuel in the United States. This is important, because when considering a play on this sector, investors have many options. They can look to individual brands like FanDuel (through Flutter), DraftKings (DKNG), or traditional brick and mortar casino operators that also have an online gaming presence like MGM Resorts International (MGM) and Wynn Resorts (WYNN). Similarly, they can play the sector via gaming ETFs such as the VanEck Vectors Gaming ETF (BJK) or Roundhill Sports Betting and iGaming ETF (BETZ).

So, where does FanDuel fit in? Well, if I am going to want exposure to this sector I want to own the best in class name. I think that is FanDuel at the moment. For support, consider the company has captured 50% of market share in the U.S. as of Q4 2022. This is no easy feat with all the competition out there!

I can attest to this myself as a user of the product. I do utilize multiple books, but FanDuel has a very user-friendly app, strong connection/location confirmation tool, and is reasonable on promotions to limit detrimental impact on profitability (just look at DKNG's promotional credits and subsequent decline in share price!).

The other point of reference is this expansion both across the globe and in the U.S. is improving the company's financials. Flutter saw a growth in both revenue and earnings in 2022 over 2021:

What I takeaway from this is FanDuel is a leading brand in a growing market here in America. Flutter has a history of such success in other primary sports betting markets such as Ireland, Britain, and Australia. I see a continuation of this trend going forward, and want to be exposed to it. EIRL offers me an easy way to do just that.

Materials Sector An Inflation Hedge

Of course, investing in EIRL is more than just a sports gambling play or a bet on Flutter. There are a number of other companies that make up this fund. Of note, it is heavily allocated to the Materials sector, with CRH plc (CRH) being the top holding (at over 22%) and over 28% in total for the sector as a whole:

For background on the top holding, CRH is a manufacturer and distributor of a diverse range of building materials, products, and solutions used extensively in the construction industry. This is a global player, so can capitalize on construction and building growth in not just Ireland but all across the world.

I think the fact this is a global player in a global industry is key here. While important developed regions like the U.S., EU-zone, and Canada are facing increased recession risk later this year, the same is not true for areas like China and India. So while construction demand may dwindle some in the U.S. (something I have yet to see personally), global strength could make up for any weakness in the Western world that does occur.

There is certainly some risk to this sector, and EIRL by extension, if we see economic downturns and prolonged recessions. If we see a recession materialize in the U.S., that could ultimately trickle in to other territories. So I would not dismiss this risk out of hand. The materials sector can definitely be impacted disproportionately if we see a marked decline in economic activity and subsequent building, construction, or production.

However, the sector may be a bit more resilient than meets the eye. The premise being that materials are necessary to build any product, regardless of the economic state of things! There is always demand for essential materials used in health care, food distribution, and from power and utility companies. People will eat, go to the doctor, and heat their homes regardless of the economy - so governments and corporations will continue to invest in those areas globally in 2023 and beyond. This provides a bit of a recession hedge and also gives investors exposure to an area that benefits from inflation. As the inputs go up in cost, those costs can be passed on to the end user.

Can Stocks Keep Going Up? A Contrarian Would Think So

My final point has to do with the outlook for equities more broadly. This is central to whether buying EIRL right now makes sense - but this can be extended when doing the analysis for any new position at the moment.

The reason behind this is that there are a lot of headwinds in the market. 2023 started off strong, but gains have slowed (and in some cases completely reversed). With recessions looming, is now a good time to be buying equities?

If you ask the average investor, the answer might be "no". To see why, consider that investors have been fleeing to cash in record amounts. This has coincided with economic worries and also Fed rate hiking as investors can earn higher yields on their cash while they wait on the sidelines:

This may sound counter-intuitive. If investors are moving out of stocks and in to cash for higher yields, wouldn't readers want to do the same?

Of course, the answer is subjective. It depends on your own allocations, risk tolerance, and outlook for the market. But for me - following the herd is not the way to go. I am a contrarian in this sense. If the masses are moving out of stocks, then I'm moving in, and vice versa. That strategy has served me well over time - and I believe it will here as well.

I acknowledge this may not be for everyone. But I see a shift out of equities and in to safe havens as the time to buy. That means selling is disproportionate and that in the future there will be a lot of cash on the sidelines to find its way back in to the market. That can open up the next bull run. For this reason I do not shy away from recommending funds like EIRL in this environment.

Bottomline

I'm 0% Irish, but I love the people and the investment opportunity the island presents. This is a unique play that I like because I think it hedges against a number of concerns I have at this juncture. This includes a slowdown in growth in the U.S. and mainland Europe and continued inflation. EIRL helps to diversify my portfolio away from U.S. recession risk and also provides a bet on the online gaming sector - something that is growing by leaps and bounds here at home. Therefore, I will keep on holding EIRL and will look to buy on any upcoming weakness. As a result, I suggest readers give this idea some thought in the weeks and months ahead.

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