Surging Warsaw Puts Polish ETFs In Focus

by on December 3, 2010 | ETFs Mentioned:

Over the past few years, many investors have taken a closer look at emerging markets in order to power their portfolios in a sluggish economic environment. A great deal of interest has been seen in the major BRIC economies of Brazil, Russia, India, and China, while smaller markets in Asia and Latin America have also seen high levels of investment inflows as well. While this increased attention to emerging markets has no doubt helped to diversify investors’ portfolios, many have overlooked the surging region of central Europe and the increasingly important economic center in Poland.

Poland’s recent history is most memorable for its tragedy; earlier this year a plane carrying key members of the country’s executive branch–including President Lech Kaczynski–crashed in rural Russia. But the country has bounced back extremely quickly and is once again leading the region in many measures of economic expansion. The country’s GDP is now growing at roughly a 4% annual clip, which is in sharp contrast to EMU members who are forecast to only grow at roughly a 1.5% rate and smaller eastern European nations such as Bulgaria, Latvia, and Romania, which may even fall back into a recession this year. In fact, Polish growth is likely to outpace 25 of the 27 nations in the EU, only trailing expansion in Sweden and Germany.

While a number of factors are likely causing Poland to outpace its chief rivals in the region, a major source of Polish growth relates to major developments in the nation’s capital, Warsaw. The city of over 1.7 million people has seen its fortunes soar and it now finds itself ranked 8th in a recent study highlighting the most important emerging market cities in the world, showing the growing importance of Warsaw as a crossroads between Western and Eastern Europe [also see Emerging Europe ETFs Head-To-Head].

Warsaw: Financial Capital of Central Europe

For many companies in nations between Germany and Russia, the decision of where to list shares is a crucial one. Often times, listing on the major exchanges in Frankfurt or Moscow is simply not possible due to the high costs associated with these bourses. This leaves a variety of smaller exchanges in cities such as Kiev, Prague, and Warsaw to compete over these smaller but often emerging companies. According to a recent story in BusinessWeek, it appears as if Warsaw is crushing the competition in this respect, and is fast turning into the top destination for companies seeking to go public in Eastern and Central Europe. In fact, the Warsaw Stock Exchange hosted the third most IPOs last year, only behind the NYSE Euronext and the London Exchange.

It is also interesting to note the strict rules enforced by Polish pension funds, which must invest 95% of assets domestically, compared to just 65% for Hungary and 50% for nearby Czech Republic. “You have an influx of mandatory investment on one hand and the state throwing in a bunch of companies on the other,” says Petr Koblic, CEO of the Prague Stock Exchange. “No other bourse in the world gets as dramatic support as the Warsaw Stock Exchange.” [see Hungary Exposure Weighs On Eastern Europe ETFs]

This influx of companies and a steady stream of capital looks to help establish Warsaw as a financial hub in the region, possibly bringing jobs to the area as well. Real estate agency Savills predicts that unemployment in the capital will decline from its current level around 7.4% to as little as 4.6% in 2012. Meanwhile, retail sales are also expected to surge across the nation, growing at a rate of 5.3% for 2011. “We want to create a little London, attracting international listings and capital here,” said Ludwik Sobolewski CEO of the Warsaw Stock Exchange. “We have a strategy of building a financial hub in Warsaw.”

Currently, there are two U.S.-listed ETFs that offer broad-based exposure to the economies of Eastern Europe, including the MSCI Emerging Markets Eastern Europe Index Fund (ESR) and the SPDR S&P Emerging Europe ETF (GUR). However, for investors looking for more pure play exposure on the surging Polish economy, the following two ETFs represent intriguing choices:

iShares MSCI Poland Investable Market Index Fund (EPOL)

This fund from iShares launched in late May of 2010 has already managed to gain close to $75 million in assets. EPOL tracks the MSCI Poland Investable Market Index, a free float adjusted market capitalization-weighted benchmark designed to measure the performance of stocks listed on exchanges in Poland. Unlike many emerging market funds, EPOL isn’t dominated by mega cap stocks; 38% of assets go towards large caps and 42% to mid caps. From a sector perspective, the fund is heavily concentrated in financials–which make up close to half of assets–with large weightings also going towards industrial materials (13%) and energy (13%) firms [read Beyond The BRIC: Ten Country-Specific Emerging Markets ETFs].

Market Vectors Poland ETF (PLND)

The original ETF tracking the Polish markets, this fund from Van Eck follows the Market Vectors Poland Index, a diversified benchmark consisting of about 25 companies either headquartered in Poland or deriving at least 50% of their revenues from the country. Currently, the fund maintains heavy weightings towards the financial (37%) and energy (17%) sectors. In terms of top holdings, copper and silver miner KGHM Polska Miedz (8%) takes the top spot and is closely trailed by two banks: PKO Bank Polski S.A. (7.7%) and Bank Polska Kasa Opieki S.A. (7.4%) [see Warning: Five Country ETFs Heavily Focused On Financials].

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Disclosure: No positions at time of writing.