Eastern Europe might not always be readily associated with free markets and capitalism. But a quick look shows that there are opportunities to capture some benefit from these markets. This article will examine a couple of ETFs associated with former Eastern Bloc countries, Russia, and some general emerging market Europe ETFs. I've also included some countries that are now referred to as Central Europe or even Western Europe. The terms are pretty loosely used and very open to debate as to whether a given country is in a given region of Europe. I've also excluded Turkey from this review.
|Ticker||Name||Assets ($ Millions)||Yield|
|RSX||Market Vectors Russia ETF||3,270||0.5%|
|EWG||iShares MSCI Germany Fund||2,650||1.1%|
|CEE||Central Europe and Russia Fund, Inc. (The)||599||0.6%|
|GUR||SPDR S&P Emerging Europe ETF||235||0.9%|
|EWO||iShares MSCI Austria Index Fund||207||1.1%|
|RBL||SPDR S&P Russia ETF||146||NA|
|TRF||Templeton Russia and East European Fund Inc.||137||NA|
|PLND||Market Vectors Poland ETF||65||0.8%|
|ESR||iShares MSCI Emerg Mkts Eastern Europe Index||32||0.6%|
The first pass analysis is a simple look at correlation to the SPDR S&P 500 Trust ETF (SPY) as well as a look at recent returns.
|Ticker||24 Month Correlation to SPY||12 Month Return||24 Month Return|
Source: Yahoo!Finance for historical monthly split and dividend adjusted stock prices.
The first observation is that both Germany and Austria show strong correlations to SPY. The next observation is that many of the ETFs are very new and offer limited histories. The various Russia and broader ETFs have somewhat lower correlations. These are actually lower than iShares MSCI Brazil Fund ETF (EWZ), which has around an 80% correlation. However, while there are not tremendous diversification benefits, the returns over 1 and 2 years were consistently better than the SPY. It is also readily noted that they recovered very strongly in 2009-2010, suggesting that there was a significant selloff during the 2008 financial crisis.
These ETFs create exposure to Eastern Europe markets, and I'm using that term pretty loosely.
|Country||February 2011 Total Equity Market Capitalization ($ millions)||2010 GDP (PPP basis) ($ millions) (IMF)||Ratio||# of Companies||Average Size ($ millions)|
Source: Number of companies and traded market capitalization are from World Federation of Exchanges. GDP figures are from International Monetary Fund as seen in Wikipedia. Data was downloaded on March 22, 2011.
One of the first observations is that these countries are extremely undercapitalized relative to the United States. Even Germany shows a pretty low ratio-- which I found to be surprising. I wrote an article focused on Latin American ETFs that showed much higher ratios - Brazil is around 70% and Chile is actually higher than the U.S. at ~130%. However, there are probably many country specific issues that could explain this result.
The second observation is a little more expected - that the more developed countries reviewed, which are not really Eastern Europe, showed much higher average company sizes. The next analysis is to look at sector allocations.
Source: Yahoo!Finance. Data was unavailable for CEE and TRF.
My first observation is that unlike Latin American ETFs, these ETFs provide better sector diversification. Both EWG and EWO show very good diversification. I also ordered the tickers from left to right in order of increasing energy percentage. Both RSX and RBL are Russia-focused ETFs and have heavy exposure to energy through Gazprom (OGZPY.PK) holdings. However, GUR and ESR are supposed to be broader ETFs. They also have high energy percentages, which, upon further research, showed enormous exposure to Gazprom and to other Russian companies.
This actually raises a pretty big question about what you are actually getting with some of the broader "Eastern" Europe ETFs. So I reran some correlation analysis against RSX, which I will use as the benchmark "Russia" ETF. The results are below:
|Ticker||46 month Correlation||17 month correlation|
Source: Yahoo!Finance for monthly prices
So this analysis shows extremely high correlations between ESR, GUR, CEE, and TRF and RSX, i.e., the broader Eastern Europe ETFs are very correlated to purely Russia-focused ETFs. Also, the Poland ETF PLND showed a high correlation to RSX as well - 88% over its 15 month life.
ETFs often create a good way to create geographic exposure. However, in reviewing these options for Eastern Europe, the effective diversification is really limited to two choices:
Create exposure to EWO (Austria) and EWG (Germany) which tracks the U.S. reasonably well.
Create exposure to Russia.
So if you are seeking exposure to Eastern Europe - either recognize that it is really exposure to Russia or you'll have to look somewhere other than these ETFs for it.
Disclosure: I am long SPY.
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.