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

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