ETF Showdown: Don't Go East, Eastern Europe That Is
In last week's edition of ETF Showdown we took a look at a pair of embattled large-cap developed Europe ETFs. Not surprisingly, the conclusion was that both should be avoided at this time. No shock here, but the same can be said of ETFs offering exposure to the region known as emerging Europe at this time.
Whether it's country-specific funds tracking the likes of Poland and Turkey or multi-country plays, emerging Europe has been dragged down by its developed neighbors. That much is clear.
So without further ado, let's get on with this week's bad vs. bad ETF Showdown between the SPDR S&P Emerging Europe ETF (NYSE: GUR) and the iShares MSCI Emerging Markets Eastern Europe ETF (NYSE: ESR).
Right off the bat, it's clear GUR has advantages in the form of fees (0.59%) and assets under management ($104.6 million). That compares with 0.69% and $25.4 million in AUM for ESR.
There isn't a huge amount of difference between these two ETFs at the sector level. Buy GUR and you get an ETF that's more than 44% exposed to the energy sector. ESR's energy weight is nearly 48%. Financials and materials account for another 33% of GUR's weight while accounting for almost 31% of ESR's sector allocation.
All told, ESR offers exposure to 11 sectors while GUR offers exposure to 10. At the country level, GUR is spread across five countries – Russia, Turkey, Poland, Czech Republic and Hungary. ESR excludes Turkey in its mix. Either way, both ETFs are heavily weighted to Russia and both make for compelling options to short following Hungary's credit rating being moved to junk status by Moody's Investors Service today.
On a technical basis, both GUR and ESR have ugly, foreboding charts. The broader market's November sell-off has forced both ETFs below key support levels. That has both laboring in no man's land and both look like they've got substantial declines ahead of them unless the market suddenly reverses course.
It's probably not wise to bet on that. At least not right now, but our mission here is to declare a winner and that's worth doing because emerging markets will come back someday, making GUR or ESR worth a look.
On the basis of lower fees, superior liquidity, a better country mix and lower exposure to Russia, we'll crown GUR the winner of this week's ETF Showdown.
Bull case: Europe's sovereign debt crisis needs to pass immediately. Inflation needs to be tamed in Eastern Europe and investors pass on Asian and Latin America emerging markets in favor of emerging Europe.
Bear case: It's happening right now. Sovereign debt woes, lowered credit ratings, soaring bond yields, falling commodities prices. Welcome to bad times for ETFs like GUR and ESR.
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