Who Else Wants A Real Eastern Europe ETF?

by on March 24, 2010

Emerging markets investing has grown in popularity immensely over the past few years, and a host of new ETFs have popped up targeting specific niches in many of the world’s most popular developing economies. Once upon a time, the only options available to investors were broad-based funds, we have seen more granular products targeting specific sectors and market capitalizations pop up as of late. In addition to this, several regional funds have grown in popularity, such as ETFs targeting all of South America or all of Asia. However, in addition to frontier markets, one area that has been overlooked has been the emerging area of Eastern Europe.

Few Funds Offer Exposure To Smaller European Countries Such As HungaryCurrently, two funds are available for investors seeking exposure to this market, including the MSCI Emerging Markets Eastern Europe Index Fund (ESR) and SPDR S&P Emerging Europe ETF (GUR) however, their country allocations leave much to be desired in terms of true emerging Europe exposure; both funds have more than half of their exposure to Russia (For more on these funds see Emerging Europe ETFs Head-To-Head).

While that may be appropriate for some investors, there are currently a variety of ETFs available for investors seeking exposure to Russia. There are several funds that hold exclusively Russian equities, as well as Russian ruble ETFs. Moreover, investors can obtain exposure to the country through BRIC funds as well. So why not an emerging Europe ETF that excludes Russia and focuses on the rest of the area which is often excluded in favor of its more well-known and larger neighbors.

Proposed Allocation

Country Allocation
Poland 40%
Czech Republic 18%
Romania 15%
Hungary 12%
Ukraine 11%
Bulgaria 4%

For this new Eastern Europe ETF, we could use GDP numbers in order to come up with the individual country weightings. By taking the nominal GDP (according to the CIA World Factbook) of the Eastern European countries, we come up with a blend that is tilted towards Poland and the Czech Republic, but that limits exposure to any one region to about 40%. This allocation would allow for an appropriate balance between the countries while accurately reflecting their place in the world and European economy.

In addition to these countries, there are a variety of smaller markets, such as the Baltic states, which could also offer invesors good levels of exposure to the emerging European area while helping to limit exposure to the often dominant Russian market and could be included in the fund.

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Disclosure: no positions at time of writing.