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Beyond Russia: How are Eastern Europe ETFs Performing?

Zacks Equity Research

The past few months have been quite choppy for Russia equities ETFs. If the stricter sanctions against the nation by the West following its Crimea annexation (previously a Ukrainian territory) were not enough, the recent downing of the Malaysian passenger plane near the Russian/Ukrainian border made matters even worse, spreading jitters among investors about these investments. 

Even though Russian equities may become stable after the current round of panic eases, these may not regain their past glory any time soon. In any case, this prime emerging nation has reached some sort of maturity level and the growth cycle is now slowing down. This would be even more true in the light of the Fed’s planned exit from the QE-era this year (read: Safe Haven ETFs to Evade Geopolitical Tensions).

Though pro-Russian rebels gave away the sought after black boxes of the crashed Malaysian aircraft, the situation seems unlikely to cool off in the coming days. If we go by a recent Bloomberg report, destruction is ongoing in East Ukraine by the pro-Russian separatists who are ignoring the renewed truce between themselves and the Kiev government on July 2.

Investment Angle

The biggest Russia ETF – Market Vectors Russia ETF (RSX) – has lost about 14.7% so far this year. In fact, Russian stocks witnessed the maximum volatility in five years during the first quarter. Quite expectedly, investors will now look for some other investing routes in Eastern Europe.

We have highlighted a few ETFs revolving around Eastern Europe that investors may want to watch, especially if the turmoil in Ukraine continues. These products will likely be in focus thanks to the crisis and may see volatility in the weeks ahead.

iShares MSCI Poland Capped ETF (EPOL)

Poland – an emerging European nation – is among the few countries in Europe that has managed to dodge the debt-crisis thanks mainly to its well-controlled financial system. Though the nation has its share of problems including sluggish industrial output, muted retail sales and a brief slowdown in GDP growth, the scenario is much better than the other Euro-area nations. Its currency is much more resilient to global shocks than the other emerging market currencies. 

Now that the ECB has come up with a new move, this emerging country has resurfaced as a wise bet in the emerging Europe space. As per the OECD economic outlook (May 2014), Poland’s GDP growth rate for 2014 is expected to be about 3% against the Euro zone average growth of 1.2% and Russian growth of 0.5%. Inflation for this year is forecast at 1.1% compared to the Euro-area average of 0.7% (read: Easy Money Policies in Europe are Great for These European ETFs).

The fund currently holds 44 securities in the portfolio, mostly from the financial sector (50%). The ETF is heavy on the top three holdings which account for almost 35% share of the portfolio. EPOL is flat so far this year (as of July 25, 2014). EPOL currently has a Zacks ETF Rank #3 (Hold) with a High risk outlook (Emerging Market ETFs: Any Bright Spots?).

Market Vectors Poland ETF (PLND)

There is another way to play the Polish economy and avoid Russian exposure in Eastern European Investing. The fund looks to track the Market Vectors Poland Index holding 30 securities in its portfolio and charging investors 61 basis points a year in fees for exposure.

PLND also puts a heavy focus on financials, with as much as 44.4% exposure, followed by a 14.4% allocation to energy, 13.5% coverage in utilities and 10.6% in materials. While Poland has 73% focus, other European nations like Italy, Portugal and Ireland hold remaining share of the basket.

The ETF is pretty much flat on a YTD look. PLND currently has a Zacks ETF Rank #3 with a High risk outlook.

Bottom Line

We would like to note that it is extremely tough to find a corner in Eastern Europe without a Russia connection. There are two ETFs namely iShares MSCI Emerging Markets Eastern Europe ETF (ESR) and SPDR S&P Emerging Europe ETF (GUR) with exposure in Hungary and Czech Republic, but both the funds have half of the total assets invested in Russia. Also, Poland is highly dependent on Russia for energy (read: 3 Energy ETFs to Buy on the Ukraine Crisis).

Keeping this dependence in mind, it would definitely be hard for the above-mentioned ETFs to outperform as long as Ukraine tensions remain. Still, with better economic fundamentals, Poland ETFs might be preferred investing destinations than the Russia funds for investors who want Eastern Europe exposure.  
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