Emerging Europe ETF

Brian Hicks

Updated September 21, 2009

There’s a better way to play emerging Europe.

You see, the most powerful plays in formerly Communist Eastern European countries are consumer-based. Of course, Russia is an important part of the BRIC pantheon… and itself the most prominent of the Eastern European emerging markets. But Moscow stocks get hit hard when raw material prices are weak.

And as commodities sagged early Monday, due to economic uncertainty ahead of this week’s G20 summit in Pittsburgh, some investors got unwittingly sideswiped by Russia in their emerging market ETF positions.

That’s because the SPDR S&P Emerging Europe ETF (NYSE:GUR) is primarily made up of Russian commodity plays, not stocks that exploit the rise of Eastern Europe’s former Soviet satellite states.

Poland, the biggest economy among former Communist states now in the European Union, is set to be the only European country with positive GDP growth in 2009.

But is GUR little more than a satellite of the Market Vectors Russia ETF Trust (NYSE:RSX)?

Let’s examine both ETFs to put their top holdings side by side and see what we’re really buying. . .

The Importance of Dissecting Emerging Europe ETFs

When comparing any menu of exchange-traded funds to see how they fit your investment goals, the first thing to look at is the list of top holdings.

In the case of the Emerging Europe and Russia funds GUR and RSX, no fewer than six of the top 10 components match up.

The overlapping plays are:

Lukoil (OTC:LUKOY)
Rosneft Oil Co. (PINK:RNFTF)
Surgutneftgaz (OTC:SGTZY)
Sberbank RF
JSC MMC Norilsk Nickel (LON:MNOD)

As you see, most of those companies are tradable outside the Moscow Stock Exchange. I don’t just mean New York; Russian companies want more than American exposure to increase their global market capitalization.

For example, Norilsk Nickel, the top nickel producer in the world and active seller of several other metals, is part of a growing number of Russian companies that are opting to draw international investment through the London Stock Exchange.

You could also hit the bulletin board to grab yourself some Norilsk shares under the ticket NILSY, but when you want to introduce an assortment of leading international shares into your portfolio, the hassle of OTC trading can get overwhelming.

U.S.-based investors are better off with the high liquidity (average volume over 2 million shares per day), and easy access that the RSX ETF provides.

Still, if each of the stocks above is in both the Russia-focused RSX and broader emerging Europe GUR — and GUR is made up of 62% Russian companies — I want a better play on the economies of places like Czech Republic, Poland, and Hungary.

In this case, after comparing regional ETFs with disappointing results, the best angle on emerging Europe this year turns out to be a single stock.

A Better Play on Eastern European Economic Growth

Central European Distribution Corp. (NASDAQ:CEDC) is based in a suburb of Philadelphia, but its reach carries straight across the Atlantic and beyond Europe’s richest nations to the former Eastern Bloc.

CEDC shares have gained over 213% since March.

This premium alcohol distributor’s sales volume is benefiting from Polish workers who have returned home from weakening western European job markets. Plumbers, mechanics, housekeepers, and other laborers from the European Union’s frontier with Russia swept by the hundreds of thousands into the United Kingdom, Ireland, and elsewhere. . . and now they’re coming home in droves to start businesses and help home-country markets advance.

Their money previously showed up as remittances in Warsaw, Prague, and countless towns and villages dotting the newest EU member states.

Now, as Polish-American columnist Mark Brzezinski wrote in The New York Times on Monday, "Poland is one of a few countries whose economies still have positive growth." He also called the Polish banking and financial system "a source of regional stability."

Poland’s own finance minister, Jacek Rostowski, said on September 19 that the Polish economy will expand by about 1% in 2009. That would make it the lone European country to log net GDP growth in this turbulent year and avoid the economic meltdown.

Poles may be a bit more cautious than their American or British counterparts in times of economic success. . . After all, scarcity is a relatively recent memory, and hunger is a sensation that is difficult to forget.

Nevertheless, CEDC investors are reaping the rewards of the company’s acquisition of Poland’s top vodka, Absolwent.

absolwent vodka

CEDC is also using that largest regional economy as an export base to tap developing countries’ thirst for premium eastern European alcohol.

That strategy means that the stock is much more powerful than a niche play on one country’s development.

Make no mistake — you want international shares in your portfolio. Oftentimes, an ETF can give you a single ticker symbol for access to a wide range of company profits. In cases like Eastern Europe, though, make sure to look beyond the fund name and into the real trends fueling top global growth stocks.


Sam Hopkins
Sam Hopkins

International Editor

P.S. Developing economies will play a key role in determining the success of the upcoming COP-15 summit in Copenhagen. Countries like Poland are leapfrogging old economic powers by attaching importance to clean energy that maximizes GDP growth, while reducing environmental liability. We’ve prepared a detailed report on the ins and outs of COP-15.

To read the details of what’s driving a slew of profits ahead of that summit, click here.

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