It is becoming increasingly difficult to find pockets of strength in the developing world. Latin American stocks are in the midst of a dismal multi-year stretch and China’s recent currency devaluation has plagued numerous emerging Asia markets and exchange traded funds.
However, Eastern European markets are proving somewhat durable relative to their other emerging markets counterparts.
“These are small nations, but in aggregate they boast well over 100 million in total population and north of $1 trillion in gross domestic product, roughly equal to Turkey and South Africa combined. Annual growth rates are running at 3% to 4%, debt is low, and current account balances are fast improving. The Polish zloty and other regional currencies held steady during the recent global yuan tantrum,” reports Craig Mellow for Barron’s.
Though not homes to noteworthy performances this year, the iShares MSCI Emerging Markets Eastern Europe Index Fund ETF (NYSEArca: ESR) and SPDR S&P Emerging Europe ETF (NYSEArca: GUR) have each outperformed the MSCI Emerging Markets Index.
While that benchmark has tanked 16.6%, GUR is off 12.8% and ESR has managed a small year-to-date gain of 0.2%. Eastern European markets have some advantages compared to other developing economies, namely lack of dependence on commodities, a trait that obviously excludes Russia. [Eastern Europe ETFs Hold Steady]
“Second, Eastern Europe produces few raw materials, aside from struggling coal mines in Poland, which turns the global commodity crash to its advantage. Third, a quarter century of democratic trial and error have yielded a broad political consensus in favor of sound macro policies, flexible export-oriented markets, and a steady if gradual curtailing of corruption,” according to Barron’s.
Clearly, there is a significant performance gap between GUR and ESR. The explanation lies in country weights. GUR allocates 46.1% of its weight to Russian stocks, more than double its weight to Polish equities and another combined 24.5% of the ETF’s weight goes to downtrodden Turkish and Greek stocks.
ESR is almost exclusively devoted to Russian and Polish stocks as those countries combine for 91.4% of the fund’s weight. ESR’s weight to Poland is more than 300 basis points higher than GUR’s, explaining some of the former’s performance advantage this year. Additionally, ESR features no exposure to sagging Greek and Turkish equities.
iShares MSCI Emerging Markets Eastern Europe ETF
