Run, Don’t Walk to the Greece ETF

ETF Trends

The Global X FTSE Greece 20 ETF (GREK) has soared 20.5% in the past 90 days. An impressive to be sure and one that is easy to explain.

Part of GREK’s surge is attributable to a broader resurgence by Europe ETFs, but there is far more to it with GREK, the lone Greece ETF. On Nov. 27, 10 Greek companies, including some GREK constituents enter the MSCI Emerging Markets Index and investors have been bidding up Greek shares in anticipation of that move. [Greece Moves Closer to EM Status]

Last month, S&P Dow Jones Indices became the third major index provider this year to demote the “G” in the infamous PIIGS acronym to emerging from developed markets status. The demotions have not derailed GREK from a year-to-date gain of 20.2%. [Greece Gets Another Emerging Markets Demotion]

Index provider MSCI conducts its November 2013 semi-annual index review on Nov. 26, meaning 10 Greek stocks will become part of the MSCI Emerging Markets Index the next day. That also means the iShares MSCI Emerging Markets ETF (EEM) will hold Greek stocks.

MSCI announced its demotion of Greece in June, so the country’s transition to the MSCI Emerging Markets Index was known to be coming for several months. However, the MSCI review comes at a time not only when GREK is one of the cheapest ETFs in the world on valuation, but also as some noteworthy hedge funds have been gobbling up shares of Greek banks. Financial services is the second-largest sector weight in GREK.

David Einhorn’s Greenlight Capital and John Paulson’s Paulson & Co. have rushed into Greek banks. Baupost, Eaglevale, Dromeus Capital, Falcon Edge, York Capital and Och-Ziff are among the other hedge funds that are reportedly making large bets on Greek banks. [Hedge Funds Love Greece ETF]

MSCI also announced that National Bank of Greece (NBG), Piraeus Bank and Alpha Bank will be a few of the Greek companies added to the MSCI Emerging Markets Index.

While Greece will be dwarfed in EEM by the likes of China, South Korea and Brazil, there are estimates that “passive, index-tracking funds will pump $500 million into the affected companies, while an additional $350 million could come from semi-passive funds that are allowed to track the index with more magnitude,” Reuters reported.

Greece will account for less than half a percent of the MSCI Emerging Markets Index and 4% of MSCI’s Emerging Europe Index. Since S&P has also demoted Greece to emerging markets status, the country could become part of the SPDR S&P Emerging Europe ETF (GUR).

Global X FTSE Greece 20 ETF

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Tom Lydon’s clients own shares of EEM.

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