Finding The Right Eastern European ETFs (GUR, ESR, TUR, UGEM, HGEM, PLND, POLE)

Scott Martin: In the best of times the markets in Poland, Hungary and the Czech Republic offer traders exposure to the frontier between oil-rich Russia and the euro zone. But lately, funds focused on these stocks have suffered on both sides of the border.

Far from providing traders with a buffer, European ETFs focusing on the central and eastern countries have mostly tracked the Russian market, nominally the biggest in the region. Where’s the diversification advantage there?

One problem funds like the S&P Emerging Europe (NYSEARCA:GUR) and the MSCI Eastern Europe ETF (NYSEARCA:ESR) have is that they remain extremely overweight Russia.

ESR is 73% Russia and 16% Poland, which leaves the rest of the region shoved into the remaining 11% of the fund’s assets.

GUR is a bit better with only 60% of its money in Moscow, opening up room for a 12% allocation to Turkey, which you can get in more concentrated form with (NYSEARCA:TUR).

However, traders looking for deeper exposure to other markets will be limited to using individual stocks as proxies and tracking those stocks through broader European ETFs.

The ETF with the heaviest weighting on the Czech Republic, for example, is technically the Global Emerging Markets Utilities fund (NYSEARCA:UGEM), which gives Czech stocks — or rather, “stock,” Prague power company CEZ — double the allocation that you’ll find in the regional funds.

Likewise, the fund most heavily focused on Hungary is actually the Global Emerging Markets Health Care ETF (NYSEARCA:HGEM) with its 6.54% allocation to local pharma Gedeon Richter.

Granted, the Czech economy is a lot more than power plants and the Hungarian economy is a lot more than a drug manufacturer, but these are the realities of investing in global markets — and it’s probably closer to reality than assuming that you can open up your portfolio to Central Europe by buying into the Russian energy giants that crowd GEM and ESR.

I’m not suggesting that a trader who wants to go long on Hungary should layer HGEM shares into a GUR or ESR position, since that composite position would then bring in a lot of baggage from unrelated drug makers throughout the world.

But it’s a start, and if you like the drug stocks anyway, it’d definitely provide more diversification away from a pure Russia fund.

Thankfully, Poland is a lot better thanks to specialized funds (NYSEARCA:PLND) and (NYSEARCA:POLE), but with the liquidity issues these ETFs present, you’d better commit to a long-term bet on the country before buying in.

Written By Scott Martin From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

Leave a Reply

Your email address will not be published. Required fields are marked *