Before we can discuss the Eastern European investment markets, it may be prudent to define what ETFs and open-ended mutual funds are.
Exchange Traded Funds (or ETFs) are innovative open-ended investment funds listed on the stock exchange. These are not mutual funds, although they offer all the benefits of diversification that a mutual fund offers. An ETF can be treated more like a stock than a mutual fund. ETFs can be bought and traded throughout the day (unlike mutual funds) which can offer a specific advantage to the investor due to flexibility and liquidity. ETFs can be sold short and bought on margin, taking advantage of the market movements within a particular sector. ETFs also allow commodity investing (like in gold, oil, or agricultural products) and currency investing.
Typically, ETFs are passively managed, meaning that each ETF follows a particular sector, country or broad-market index and the manager doesn’t specifically choose which stocks to buy or sell. Most ETFs have low expense ratios and some target specific countries (like those in Eastern Europe).
An open-ended mutual fund meets the true definition of a mutual fund, where financial intermediaries (professional money managers) group with investors who pool their money together to meet the investment objective of making money. An open-ended mutual fund, unlike a closed end mutual fund, issues and redeems shares on demand. As investors deposit money into the fund or take it out, the total assets of the fund grows and shrinks daily. Open-ended mutual funds have the advantage of flexibility and liquidity, and the majority of them allow transferring monies amongst various funds with the same ‘family’ of funds without any fee charges. The risk of an open-ended mutual fund is lower because of the diversification of funds involved, but can also depend on the investment strategies and objective of the types of holdings chosen.
The establishment of the European Union in 1993 provided a lot of potential for growth in the Eastern European investment market. The present European Union is comprised of 27 sovereign Member States (Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxemburg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom, with Croatia, Macedonia and Turkey as other official candidate countries who are currently negotiating membership in the EU and Albania, Bosnia and Herzegovina, Montenegro, Serbia and Iceland which are potential candidates).
Previously the Eastern European Bloc of countries was mainly composed of all the European countries liberated and occupied by the Soviets. But since 1989 and the fall of the Iron Curtain, the political landscape changed and the Soviet Union ceased to exist. Since then many countries in Eastern Europe joined the EU, namely Estonia, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Bulgaria, and Romania. As you can see, with all the European countries adopting a standardized system of laws, which applies to all member states, this ensures the free movement of people, goods, services and capitals making the Eastern European countries a prime market for investment.
Russia, however, still plays a major role in the Eastern European emerging markets. It is in itself the most prominent of the Eastern European emerging markets, but it does tend to get hit hardest when raw material prices are weak.
Now that you understand what ETFs are, you can consider why it is a good idea to include Eastern European ETFs in your global portfolio. The Eastern European markets have been generating exciting returns on investments over the past couple of years. One reason has been because the large amount of money is being poured into Poland, Hungary and the Czech Republic with their inclusion into the EU and their adoption of the euro.
A few facts to consider are that the Western European economy has finally taken off, and the Euro currency is at a relatively high level. The European community in the EU is expanding eastward and a lot of growth potential seems likely in that area as the economies of these less-developed regions are forecast to grow in the coming years. Germany seems to be the backbone of European growth, and it borders on the Czech Republic and Poland and is close to other Eastern European countries. Russia also borders Eastern Europe and is seen as the largest and richest commodity countries in the world. Also Eastern European countries still have a relatively cheap workforce. . All of these reasons seem to indicate that there is great potential for investment in the Eastern European markets.
Also, the U.S. dollar has declined while European currencies have dramatically boosted the European equity returns. That means if you own a mutual fund that buys stocks denominated in Euros, the fund gains in value when those currencies appreciate. Most of Europe’s gains over the past 3 years have come from the currency exposure. But it doesn’t stop there. There are many European companies that are global players. Normally, where a company’s headquarters is located is not a real factor as to its importance in the marketplace, but since European interest rates remain low, this has stimulated economic growth and increased business activity.
The question remains “Will the Eastern European investing still be a good market to get into?” No-one knows the future and hot markets often cool off. If you consider that the U.S. market was soaring in the late 1990’s while the European market and the Euro were not prominent.
Since ETFs centre on a particular sector in the investment marketplace, the growing economies of the Eastern European countries are quite promising. At the moment, however, the Eastern European investment opportunities look great, but it is possible that this could change. That is why looking at ETFs and open-ended mutual funds are a good way to go when considering investing in Eastern Europe. If the market does take a performance plunge, those types of funds make it easier to go with the current flow of events because they are so flexible.
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