Eastern Europe ETFs showing strong 1-year returns

Jul 19th, 2017 | By | Category: ETF and Index News

ETFs tracking Eastern Europe equities have delivered strong returns over the past year on the back of robust economic growth in the countries within this bloc. The iShares MSCI Eastern Europe Capped UCITS ETF (LON: IDEE) is up 20.9% over the past year.

Eastern Europe ETFs among best performing emerging markets

The economies of Czech Republic, Romania, Poland, Hungary and Slovenia have all grown by more than 1% during Q1 2017.

IDEE tracks the MSCI Eastern Europe 10/40 Index which is predominantly exposed to Russia (60.5%), followed by Poland (27.3%), Hungary (6.9%) and Czech Republic (3.7%). The fund has $210m in AUM and a total expense ratio (TER) of 0.74%.

IDEE has lost momentum in 2017 however, actually losing 2.8% year-to-date as sinking oil prices has resulted in significant losses to Russia-listed equities and pushing ETFs such as the iShares MSCI Russia UCITS ETF (LON: CSRU) down as much as 15% in 2017.

Despite the turnaround in Russia’s fortunes, countries from central Eastern Europe have continued to thrive.

The iShares MSCI Poland UCITS ETF (LON: SPOL) has been one of the best performing ETFs thus far this year. SPOL, which trades in British pounds, is up 41.2% year-to-date, while its US dollar-denominated share class (Ticker: IPOL) is up 30.7%. The ETF has $110m in AUM and a TER of 0.74%.

In Hungary, the Budapest Stock Exchange Index, referred to as the BUX, reached an all-time high this week and has risen by a whopping 116% since the start of 2015. The blue-chip index, which tracks up to 25 major Hungarian companies listed on the Budapest Stock Exchange has grown almost 20% year-to-date.

Further gains may be likely for the country’s equities as the Hungarian central bank has just announced it will be maintaining its key interest rate at 0.9%, further supporting growth in the country despite some indicators suggesting an increased risk of inflation in the future.

The Czech, Slovenian and Serbian stock markets are also performing well, up by approximately 15% each thus far this year.

The strong stock market performances are reflective of robust growth across these economies – Czech Republic, Romania, Poland, Hungary and Slovenia have all seen their GDP grow by more than 1% during the first three months of the year with Romania topping the list at an impressive 1.7% growth during the quarter.

Other economic indicators are also painting a bright picture with unemployment, industrial production and retail sales volumes, all supportive of economic growth.

Facilitating the Eastern European bloc’s strong economic expansion is the surprise recovery in the eurozone economy which after years of suppressed growth is starting to take off. Quarterly growth in the eurozone expanded at its fastest pace since 2015 at the start of the year. Also, in its Spring Forecast, the European Commission forecast euro area GDP growth of 1.7% in 2017 and 1.8% in 2018.

Surprise weakness in the US dollar this year has also benefitted emerging market countries as the Hungarian forint, Czech crown, and Polish zloty have each now hit their highest level against the dollar for two years.

While a weaker dollar is most beneficial for Asian emerging markets whose economies are relatively more reliant on exporting commodities, the fall in the greenback would have provided a boost for the Eastern bloc nonetheless.

Emerging market ETFs in general are also benefitting from investor momentum as the segment has experienced a renewal of popularity this year. Broad emerging markets equity ETFs drew in $3.8bn in June, marking the sixth consecutive month of positive net inflows for the segment, the best monthly run since January 2013 when a run of seven straight months came to an end. In addition, emerging markets debt flows added $3.2bn in June with the sector remaining resilient despite steep declines in oil prices.

According to Patrick Mattar, iShares EMEA capital markets team, “Investors have seemingly focused on improving fundamentals rather than the protectionist rhetoric that characterised the US election campaign when making asset allocation decisions.”

Eastern European ETFs in particular are enjoying this renewed interest as some investors may have decided to redirect money away from some of the traditional BRICS emerging market countries in light of low oil prices, ongoing political scandals in Brazil and South Africa, ratings downgrades, and questions over the sustainability of growth in China.

Investors looking for access to a regional play on Eastern Europe while avoiding Russia may wish to consider ETFs from providers Lyxor or Amundi.

The largest is the Lyxor Eastern Europe CECE EUR UCITS ETF (LON: CECD) with over $240m in AUM. It tracks the CECE EUR Net Total Return Index, a capitalization-weighted index consisting of Czech, Hungarian and Polish blue chip stocks. CECD has a TER of 0.50%.

The Amundi MSCI Eastern Europe Ex Russia UCITS ETF (LON: CE9U) provides exposure to around 30 companies from Hungary, Czech Republic or Poland. It has $55m in AUM but a TER of just 0.20%.

Commerzbank and SPDR ETFs also offer funds with targeted Eastern Europe exposure although they are much smaller in size.

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