Analyse: iShares MSCI Eastern Eurp 10/40

Ein ETF für das taktische Investment, bei dem Russland und der Energiesektor im Vordergrund stehen. 

Lee Davidson 06.06.2012
Rolle im Portfolio

The iShares MSCI Eastern Europe 10/40 ETF provides exposure to Eastern European emerging market equity markets. The fund is most suitable for use as a tactical satellite tool due to its sector and geographic concentration, considerable volatility, and high correlations to broad equity markets. While the reference index identifies itself as benchmarking the broad Eastern European region, Russian equities make up 70% of the index, with equities from Poland (19%), the Czech Republic (6%), and Hungary (5%) accounting for the remainder. With its massive stake in the index, Russia's economic fundamentals will largely determine the ETF's performance. In recent years, Russia has proven to be a very volatile investment proposition due to its limited economic breadth across sectors, inconsistency of fund flows, and a significant dependence on oil and gas exports. At this time, oil and gas exports comprise nearly two-thirds of all Russia's exports, making Russian GDP and equities very sensitive to fluctuating energy prices. As of this writing the MSCI Eastern Europe 10/40 Index’s largest sector exposure was energy, at some 40% of the index’s total value. Concentrated exposure to the energy sector has translated to elevated volatility. The annualised standard deviation of returns for the reference index has equaled 32.6% over the past three years compared to 17.4% for the MSCI World Index.

In recent years, with the escalation in volatility globally, correlations between the MSCI World, STOXX Europe 600, and the reference index have actually been on the rise. From 1999-2009, the MSCI Eastern Europe 10/40 index exhibited a correlation of around 75% to both the MSCI World and STOXX Europe 600. However, over the past three years, the correlation has risen to 87%. Therefore, it would appear diversification benefits derived from investing in Eastern European equities is declining.  

Fundamentale Analyse

Historically, the performance of the MSCI Eastern Europe 10/40 index has largely been a function of the change in global commodity prices, and in particular of the price of oil as evidenced by its trailing 5-year correlation of 71% to the spot price of Brent crude. Given this index's 40% allocation to energy, investors can reasonably expect that the dynamics of the oil market will continue to significantly influence this ETF's returns. With the continued urbanisation of emerging market economies and the absence of any suitable substitutes, the demand for crude oil shows no signs of abating. Since crude oil is a depletable resource which cannot be recycled, economic theory would suggest that as the world's dependence on oil increases (or even remains constant), oil prices must increase in the long run due to a diminishing level of supply and a lack of available substitutes. In fact, crude oil exhibits low price elasticity; meaning changes in oil prices do not significantly affect the amount of oil consumed. That said, projecting the price of oil is decidedly speculative since it has historically exhibited enormous amounts of volatility.

An investment in Eastern European equities certainly has its share of risks associated with the price performance of oil, but investors also place substantial hopes in the performance of the Russian economy. Despite rising commodity prices in recent years, the Russian economy has experienced an uneven recovery. Prior to 2008, it expanded at an annual pace of around 7% for ten years due to the growth in oil/gas exports, higher oil prices, and a rising middle class. However, the financial crisis stunted this long-term growth trend and GDP declined by 7.8% in 2009 due to falling domestic demand. Thereafter, GDP growth has resumed a positive, albeit volatile trajectory. GDP growth slowed in the second quarter of 2011 to 0.3% q/q, but picked up slightly in the third quarter 2011 with 0.4% growth. In 2012, the IMF and other economic agencies forecast Russia's GDP growth to be in the neighborhood of 3.5%, marking a slowdown from 2011's forecasted 4.1%. With uncertainty plaguing the eurozone, however, economists are quick to note that significant downside risks remain, especially in light of Russia's public finance vulnerabilities. Currently, Russia's public finances are spread quite thin as the overall nonoil deficit (overall balance excluding oil revenue) has more than tripled compared to pre-2008 period. 

Looking ahead, Russia's medium-term outlook is hampered by the country’s overdependence on oil and procyclical economic policies. Russia's primary challenge will be to construct effective economic and fiscal policies that can leverage the commodity price surges to place overall economic growth and fiscal stability on a more sustainable arc while reducing its sensitivity to external economic forces, like energy prices. 

Indexkonstruktion

The MSCI Eastern Europe 10/40 NR index includes approximately 85% of the free-float adjusted market capitalisation within each industry group in Eastern European emerging countries (Russia, Poland, Hungary, and Czech Republic). Because closely held firms will have a smaller share of their aggregate market capitalisation floated on public exchanges, the free-float adjustment serves to ensure that the underlying liquidity of the holdings is superior relative to a pure market capitalisation weighting. Components must meet minimum criteria for liquidity, free-float, and size. The imbedded 10/40 rule ensures the fund complies with UCITS regulations that a single company is limited to 10% of the index. Furthermore, the sum of all companies with weights between 5% and 10% is limited to 40%. The index is reviewed quarterly, with May and November semi-annual reviews tending to be more comprehensive than those undertaken in February and August. As of this writing, there are 55 companies included in the index. Russian equities make up approximately 70% of the index, followed by Poland (19%), Czech Republic (6%), and Hungary (5%). The top sector weighting is energy (~40%), followed by financials (~22%), materials (~13%), and telecommunications services (~11%).

Fondskonstruktion

The iShares MSCI Eastern Europe 10/40 ETF uses optimised physical sampling to track its reference index. The ETF invests in only in a portion of the index’s constituents which represent the benchmarks’ risk-return characteristics as closely as possible. At the time of this writing, however, iShares holds 51 of the 55 securities in the MSCI Eastern European 10/40 index and holds them in percentages comparable to the index. Given these facts, therefore, this fund may not legally be defined as a fully-replicated physical ETF, but it should really behave as one. iShares may engage in securities lending to generate additional revenues. The lending revenue generated can partially offset the TER and it is split 60/40 between the fund and BlackRock. To protect the fund from the counterparty risk that results from this practice, iShares takes collateral greater than the loan value. Collateral levels vary from 102.5% to 112%, depending on the assets provided by the borrower as collateral. Cash received as dividends from the underlying stocks is held in the fund’s income account until it is distributed to fund holders. Distributions are made on a quarterly basis. This dividend treatment can potentially create a drag on returns in upward trending markets as dividends are not immediately reinvested into the fund. In practice this cuts both ways. It could also result in outperformance if the benchmark falls in this interim period. The fund is domiciled in Ireland and was launched in November 2005. Its base currency is US dollars.

Gebühren

The iShares MSCI Eastern Europe 10/40 ETF levies a total expense ratio (TER) equal to 0.74%. For a predominantly Russian fund, we think this is a little steep as most Russian equity ETFs have TERs that hover around 0.65%. However, investors seeking exposure, albeit minimal in this case, to the less liquid Polish, Czech, and Hungarian markets, might find the extra cost a fair trade-off. 

Alternativen

Investors seeking an alternative to the iShares product can consider other ETF providers tracking the same index or a strictly Russian-focused ETF. ComStage offers a slightly cheaper synthetic replication ETF, as measured by TER, tracking the same index as the iShares ETF. In terms of assets under management, the ComStage ETF is smaller but does boast a higher turnover ratio percentage indicating liquidity may be less of an issue. The ComStage ETF levies a TER of 0.60%.

At the time of this writing, there are quite a few ETFs offering exposure to the Russian equity market. The largest is the Lyxor ETF Russia tracking the DJ Rusindex Titans 10, which tracks the performance of the ten largest and most liquid Russian equities. The Lyxor ETF levies a total expense ratio of 0.65%.

Investors seeking a more diversified exposure to the Russian equity market could consider the db x-trackers MSCI Russia Capped Index ETF. The index includes 26 Russian stocks, chosen with an emphasis on size and liquidity. The ETF levies a TER 0.65%.

Über den Autor

Lee Davidson  is an ETF analyst with Morningstar Europe.