New iShares Poland ETF Lacks Diversification of Its Market Vectors Counterpart

Includes: EPOL, PLND
by: Ron Rowland

BlackRock (NYSE:BLK) launched iShares MSCI Poland Investable Market Index Fund (NYSEARCA:EPOL) on Wednesday 5/26/10. This product arrives six months after Van Eck introduced US investors to Poland via Market Vectors Poland (NYSEARCA:PLND). Typically when a firm launches a new product into occupied space, they try to ensure the new product is somehow superior to the existing one. In the case of EPOL, I believe they failed.

The new EPOL ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Poland Investable Market Index. The underlying index uses a free-float adjusted market cap-weighted methodology. According to the EPOL overview page, the fund will have an expense ratio of 0.65%

The underlying index currently has 62 current constituents with the largest being PKO Bank Polski 17.5%, Bank Pekao 13.1%, KGHM Polska Miedz 10.1%, Polski Koncern Naftowy 8.2%, and Telekomunikacja Polska 7.0%.

The sector breakdown is Financials 46.1%, Energy 13.0%, Materials 12.6%, Telecommunications 7.4%, Industrials 6.8%, Consumer Discretionary 6.1%, Utilities 4.1%, Technology 2.5%, Consumer Staples 1.2%, and Health Care 0.2%. Additional index characteristics can be found in the EPOL fact sheet (pdf).

The reason I believe that Market Vectors Poland (PLND) is a superior product boils down to one word – diversification. Don’t be fooled by the fact the new EPOL has 62 constituents versus only 29 for PLND. You need to look at the individual stock and sector weightings.

BlackRock was probably locked into using an MSCI index for this product, and I suspect that is where the problem begins. Any index that allows for a 17.5% weighting in a single stock is a flawed methodology in my opinion. Meanwhile, the index used by PLND (PLND holdings and overview) limits that same stock to just 8.5% currently.

BlackRock is obviously counting on the iShares brand name for the success of EPOL. For my money, I will likely be using PLND when I want exposure to Poland.

Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.