EWO: Take Advantage of Targeted Investment in Austria

Austria’s economy has rallied in 2009, helping to boost returns of the iShares MSCI Austria Investable Market Index Fund (EWO) to more than 61% year to date. EWO is among the popular iShares MSCI funds. This indexing method allows iShares to take “slices” of the MSCI index to offer individual country funds. EWO tracks the MSCI Austria Investable Market Index, which contains publicly traded securities in the Austrian market. The fund uses a capitalization weighting strategy, so Austria’s largest companies are included in EWO’s basket.

The last three months have been particularly good ones for EWO, with the fund rising 32.51%. EWO’s performance has been reflected in our momentum rankings. EWO jumped from the No. 40 spot on our Sector Momentum Tracker ETF international rankings on June 16 to the No. 17 spot on August 25. We added EWO to our ETF International Portfolio on August 19, 2009. While this fund may be a good way to capitalize on the upswing and gain diversification, Austria’s road to recovery may continue to be bumpy.

The recent rebound in the market has renewed investors’ appetite for risk. International funds, in particular, have seen a resurgence in assets. The influx of interest has spurred new issuers to join the ETF universe and offer new international funds to eager investors. Van Eck recently launched a Vietnam ETF (VNM), while Global X premiered the FTSE Nordic 30 ETF (GXF).

While many of the new international funds are promising, investors should be mindful of the benefits of established funds like EWO. This Austria fund dates back to 1996 and has a three-month average trading volume of more than 100,000 shares. EWO’s track record and liquidity are beneficial for investors looking to allocate assets abroad.

EWO’s market capitalization weighting strategy and 35 holdings make this fund approachable and easy to understand. This indexing strategy, however, is not without its drawbacks. Nearly 50% of EWO’s assets are concentrated in the top 5 holdings. International funds can be volatile by nature, and a high concentration in top components adds some security specific risk.

While Austria’s major companies have performed well so far this year, there are still signs that a more permanent recovery may not be immediate. Austria’s Central Bank expects a contraction of 4.2% in GDP for this year, and another 0.4% contraction in 2010. Exports worldwide have suffered as a result of the global economic crisis, and Austria’s exports to Germany continue to be weak.

EWO’s third largest holding, Telekom Austria AG (TKAGY.PK) reported last week that net profit fell 15% in the second quarter of 2009. The company cited the economic crisis and new Eastern European roaming regulations as reasons for lower profits. Despite these factors, and a decrease in sales, Telekom Austria believes that staff reductions and cost cutting have been able to make up for lost subscribers. The company expects to continue a share buy-back program in 2010.

The largest sector allocation in EWO, at 31.32%, is financials. While the worst of the global crisis may be behind investors, Austrian banks—including EWO top holding Erste Bank (EBKDY.PK)—could continue to struggle. Fitch Ratings recently released a report citing a tough operating environment and loan impairment charges as challenges for Austrian banks. Fitch notes that “Austrian banks have been significantly affected by the disruption of the wholesale capital and inter-banking markets in late 2008 in addition to the rapid economic deterioration in central and eastern Europe (CEE) and the Commonwealth of Independent States (CIS), which are major markets for all large Austrian banks.”

While these challenges continue to affect Austria’s financial sector, Austrian banks have been aided by economic support funds designed to strengthen the capital bases of these banks and provide funding and liquidity. European banks were hit hard by the economic downturn, but Austria’s own financial stimulus continues to help to boost its financial sector.

OMV AG (OMVKY.PK), EWO’s second largest component, sees opportunities in the current economic environment, despite a fall in profits. In early August, OMG reported that it was negotiating to buy the remainder of Turkish company Petrol Ofisi (PTOFS.IS), a company that it already has a stake in. Petrol Ofisi is Turkey's leading refined products marketer and operates 3,200 filling stations across Turkey and employs 1,100 people. While this opportunity is a bright spot for OMV, the company also reported that second-quarter net profit fell 79%. OMV credited the loss to lower oil prices and declining distillate spreads.

Economic challenges continue to face investors both at home and abroad. The international community, however, is bouncing back, and ETFs represent an easy way for investors to get involved. EWO is a liquid, established ETF that can help investors gain exposure to Austria’s market. The fund’s 0.52% fee is very reasonable for an ETF with this kind of focus. Investors should take advantage of targeted international opportunities like EWO for diversification, but keep allocations small.

Comments

[recession g...:]

can you provide any color on the state of erste bank's loan portfolio?

their tier 1 capital seems a bit thin given their exposures, i'd be interested to know what kind of a dislocation would be necessary to cause a big shake out.

Sep 10 04:00 PM