Eastern Promises: Russia Lifts Emerging Europe ETFs

When Russian stocks sneeze, other Emerging Europe equity markets catch colds. That much was evident last year when the Market Vectors Russia ETF (NYSEArca: RSX) plunged 47.2%, a drop that infected other Emerging Europe exchange traded funds.

Last year, the iShares MSCI Emerging Markets Eastern Europe Index Fund ETF (NYSEArca: ESR), itself a Russia-heavy fund, lost 37.6% while the iShares MSCI Poland Capped ETF (NYSEArca: EPOL) and the Market Vectors Poland ETF (NYSEArca: PLND) each lost more than 15%.

This year, the story for emerging Europe ETFs is different. Only one non-leveraged ETF has outperformed RSX on a year-to-date basis while ESR has been outpaced by just eight other ETFs. More upside could be ahead for Emerging Europe ETFs.

“The economic health of the rest of the region has little to do with the Kremlin’s woes. While Russia is a major oil exporter, other emerging Europe countries, including Poland and Turkey, are energy importers and have actually benefited from the petrol crash,” reports Lewis Braham for Barron’s.

While Moscow does not always dictate how other ETFs with Eastern Europe exposure perform, there are non-Russia issues to consider. For example, PLND and EPOL, the two Poland ETFs, suffered earlier this year when the Swiss National Bank surprisingly scrapped the franc’s peg to the euro. The Polish economy is that the country is home to $35 billion worth of franc-denominated mortgages, an ominous trait when the franc is strong. [Franc’s Rise Punishes Poland ETFs]

Franc-denominated mortgages in Poland are a relic of pre-global financial crisis days. After the zloty, Poland’s currency, tumbled during the crisis, Polish banks ceased offering mortgages denominated in francs. However, franc-denominated mortgages issued prior to 2008 remain in use, underscoring the vulnerability of Polish banks and borrowers to ongoing strength in the Swiss currency. [Poland ETFs Endure]