Earlier this month, iShares launched the Emerging Markets Eastern Europe Index Fund (ESR), offering U.S. investors an efficient way to gain exposure to an often overlooked corner of the European market. While there are countless European ETF options, these funds generally focus on the developed economies of western Europe, including France, Germany, and the United Kingdom. ESR will compete most closely with an ETF product from State Street, the SPDR S&P Emerging Europe ETF (GUR). While these ETFs are very similar in many ways, there are some key differences between the two that could be of critical importance to those considering an investment in emerging European economies.
Indexes And Country Exposure
ESR seeks to replicate the MSCI Emerging Markets Eastern Europe Index, a benchmark designed to measure the equity market performance of four emerging market countries, including Czech Republic, Hungary, Poland and Russia. GUR is linked to the S&P European Emerging BMI Capped Index, a market capitalization weighted index that defines and measures the investable universe of publicly traded companies domiciled in emerging European markets.
The holdings for these two emerging Europe ETFs are very similar, as both are dominated by holdings in Russian stocks. Russian energy giant Gazprom makes up nearly 25% of ESR and about 17% of GUR, making it the largest individual security in both ETFs. Lukoil, Russia’s largest oil company with more than 10 trillion barrels in proven reserves, receives the second largest allocation in both ETFs, accounting for 11% of ESR and more than 9% of GUR. So while these ETFs may sound like diversified investment opportunities, they both maintain a major allocation to Russia’s energy sector. Overall, ESR has about 75% of its holdings in Russia, while 65% of GUR is in Russian stocks.
Beyond Russia, both funds have moderate allocations to Poland, Hungary, and the Czech Republic. But only GUR invests in Turkish stocks as well, putting about 15% of its assets in the Mediterranean country (read a complete rundown of the iShares Turkey ETF here). ESR steers clear of Turkey, giving it less overall geographic diversification but avoiding investments in a potentially volatile economy.
Depth And Expenses
As far as depth of exposure goes, the edge goes to GUR, which maintains 83 individual holdings compared to only 52 for the iShares fund. ESR’s top ten holdings account for about 65% of total assets, compared to about 55% for GUR. A tilt towards the energy sector dominates both ETFs, accounting for about half of ESR and 45% of GUR.
GUR also gets the advantage on the cost side, charging an expense ratio of 0.59% compared to 0.72% for ESR.
For ETF investors looking to establish a position in the emerging economies of Europe, the decision between ESR and GUR will likely come down to Turkey. For those looking to gain exposure to the Mediterranean nation with a young population, robust infrastructure network, and potential to thrive as the crossroads of Europe, GUR may be the way to go. But for those concerned about the potential adverse effects of being located in the geopolitical hotzone, ESR may be more optimal.
Outside of exposure to Turkey, GUR offers several advantages, including lower expenses, lower concentration of individual holdings, and more balanced sector allocations, giving this ETF the edge for those looking to minimize expenses or achieve more diversified exposure.
Disclosure: No positions at time of writing.