US-Listed ETFs Sorted by Asset Class and Year-to-Date Return

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Figure 2 ETF Country Weights EUROZONE PAN-EUROPEAN FEZ EZU FEU ADRU IEV VGK UK 0.00% 0.00% 37.92% 47.34% 34.08% 33.10% France 37.05% 30.78% 11.66% 7.87% 14.79% 15.40% Germany 30.55% 28.04% 15.63% 6.96% 12.17% 13.10% Switzerland 0.00% 0.20% 18.23% 10.80% 12.75% 12.00% Spain 13.20% 11.20% 6.35% 7.93% 5.12% 5.50% Sweden 0.00% 0.00% 1.90% 0.00% 4.83% 4.80% Italy 8.93% 8.52% 3.33% 2.29% 4.14% 4.40% Netherlands 5.52% 8.97% 2.44% 5.02% 3.94% 4.00% Belgium 2.02% 3.11% 1.21% 1.60% 1.47% 1.40% Finland 1.84% 3.80% 1.10% 0.00% 1.57% 1.60% Ireland 0.71% 0.81% 0.00% 0.00% 0.38% 0.40% Denmark 0.00% 0.00% 0.00% 1.49% 1.29% 1.60% Israel* 0.00% 0.00% 0.00% 1.68% 0.00% 0.00% Luxembourg 0.00% 1.59% 0.00% 0.00% 0.79% 0.00% Austria 0.00% 1.13% 0.00% 0.00% 0.41% 0.50% Portugal 0.00% 0.86% 0.00% 0.00% 0.47% 0.40% Greece 0.00% 0.77% 0.00% 0.00% 0.25% 0.40% Norway 0.00% 0.00% 0.00% 0.00% 1.14% 1.40% Sources: iShares, PowerShares, SSgA and Vanguard. Data as of 3/25/2011. *ADRU’s index is the only one in the group to include Israel in its selection universe. down in the pan-European funds. Switzerland has a much higher concentration in health care, which manifests itself in the pan-European ETFs, as does its much lower utilities concentration. (See Figure 3.) All told, the biggest differences between the two baskets of securities occur in the energy, industrials, health care, consumer discretionary and utilities sectors. Any investor wary of the European health care sector may want to invest in eurozone ETFs over pan-European. Even though Denmark, Sweden and Norway make up a smaller percentage of securities by weight than the U.K. and Switzerland, their higher allocation is still enough to pull up the health care totals. Similarly, the pan-European ETFs all have higher weightings in energy. Given the recent nuclear energy fears, investors may want to embrace or avoid energy stocks, depending on their outlook. Another consideration: The eurozone ETFs have higher consumer discretionary weightings, which may be an interesting play for those who forecast a global recovery driven by consumers. Fewer Differences In Performance Despite fairly different sector and country weights, the return series of the major eurozone ETF and the major pan-European ETF are highly correlated. The iShares MSCI EMU ETF (EZU) and Vanguard MSCI Europe ETF (VGK) have an r 2 of 95 percent since EZU’s 2005 inception. Although correlations are generally very high, they occasionally drop in response to country- or currency-specific events. For example, when the time frame is limited to March 2007-July 2008, the r 2 drops from 95 percent to 91 percent. During this period, the British pound began its collapse, dropping from a high of 1.49 euros per pound to 1.25 euros. Although the pound had not yet bottomed out in July 2008, the other European countries started suffering alongside the United Kingdom. Investing in an international ETF means you’re also investing in the underlying currencies that each underlying stock uses, and this can affect your choice. The British pound collapse is a prime example of an event that may only impact one of the two potential baskets of securities. However, this example also shows that because Europe is so intertwined, a crisis in one country generally spreads to the others— sometimes even before the crisis 12 10 ETFR • May 2011
From Russia With Love from page 1 than entities like the IMF. They decide a country’s status based on specifically defined factors. “It’s purely quantitative,” said Dimitris Melas, executive director of Research at MSCI. “We’re not looking at subjective factors, like whether they have natural resources or not,” he explains. “As you would imagine, what we classify as emerging markets, some of those markets may have natural resources, others not. The criteria are actually very, very objective when it comes to economic development.” That means looking at macroeconomic measurements like GDP per capita, but also at the size, liquidity and openness of capital markets. At the end of the day, index providers must draw a line in the sand and decide what’s still developing and what’s developed. That means two countries with very different economies—say, Russia and Hungary— end up under the same umbrella. The quantitative approach takes much of the guesswork out of developing indexes, but it also means a host of countries that fall along different parts of the development spectrum end up in the same bucket. For instance, India’s GDP per capita is just $3,400. The Czech Republic, also labeled emerging, is several times higher, at $25,600 (by comparison, the U.S. is at $47,400). And of course, every index provider has its own set of factors in the analysis. The Country Lineup So what countries make up the emerging Europe segment? There are some surprising answers. As we’ve seen, Russia makes the cut. Both S&P and MSCI consider Russia part of Europe, and that ends up playing a huge role in the holdings of the two broad-based emerging Europe funds. The other surprise is Turkey, a country whose status as “European” is often questioned. The major index providers diverge in their classification of the country’s status. S&P lumps it in with Europe, while MSCI considers it part of the Middle East. That shakes out in the ETF world, with roughly 17 percent exposure to the country in GUR, while the MSCIbased iShares fund has none. Poland, Hungary and the Czech Republic are the other emerging European economies large and liquid enough to be held by ETFs in meaningful amounts. Big Fish In A Little Pond Russia’s inclusion in the two broadbased emerging Europe ETFs is a double-edged sword: It provides exposure to one of the world’s largest emerging economies, but it significantly dilutes exposure to anything else. Adding Russia to a portfolio has another side effect: It creates huge sector tilts. Energy and basic materials, big drivers of the Russian economy, together make up over 60 percent of the iShares emerging Europe exposure. Gazprom, the Russian energy giant, single-handedly accounts for approximately 20 percent of both broad-based ETFs—more weight than the entire nation of Poland. Greg Savage, a senior portfolio manager at BlackRock, shrugs off Russia’s Figure 1 Top 5 Countries: ESR And GUR ESR Source: Bloomberg. Data as of April 7, 2011. dominance. “We view indexing in a market cap framework,” he said. “So if you’re going into an Eastern Europe index, Russia is going to have a large weight there.” Single-Country ETFs For those turned off by the heavy Russia exposure of the broad-based funds, the alternative is to invest in single-country ETFs; in essence, creating your own index of Eastern European economies. These products let investors balance their country exposure to their liking. The country options are limited—there are no Czech or Hungary ETFs on the market, let alone smaller Eastern European economies— but funds covering Poland, Turkey (and of course, Russia) are available. The second-tier countries, while lacking the star-power of Russia, have merits of their own. As Savage puts it: “One of the differences is that on a GDP per-capita basis, Eastern Europe has significantly more wealth than Brazil, China, and In- GUR Russia 74.07% Russia 59.01% Poland 17.03% Turkey 16.62% Hungary 4.41% Poland 12.57% Czech Republic 4.13% Hungary 4.56% Ukraine 0.34% Czech Republic 4.11% Figure 2 Sector Weights: ESR And GUR Consumer Discretionary 0.44% 3.32% Consumer Staples 2.67% 1.74% Energy 48.13% 39.43% Financials 21.91% 23.41% Health Care 0.93% 1.09% Industrials 0.18% 2.96% Information Technology 0.16% 0.28% Materials 13.00% 14.20% Telecommunication Services 5.37% 9.24% Utilities 6.82% 3.61% Not Classified 0.38% 0.72% Source: Bloomberg. Data as of April 7, 2011. ESR GUR ETFR • May 2011 11
Page 1 and 2: Issue No. 126 May 2011 www.indexuni
Page 3 and 4: Index Publications LLC 353 Sacramen
Page 5 and 6: T H E P O W E R S H A R E S D B COM
Page 7 and 8: German ETFs: Now Or Never? By Paul
Page 9: Eurozone Vs. Pan-European: Know The
Page 13 and 14: What’s really in your ETF index?
Page 15 and 16: May 2011 U.S.-Listed ETFs Sorted by
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US-Listed ETFs Sorted by Asset Class and Year-to-Date Return

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