ETF Fans Await Prague Spring

Eastern European stocks have been sizzling, but for ETF investors the region remains tantalizingly out of reach.

A leading index tracking shares in Russia, Poland, Hungary and the Czech Republic jumped 21.5% in local currencies in 2004. In dollar terms, last year's gain was 32.1% -- nearly triple the S&P 500's rise.

Active managers running Eastern European open-end mutual funds have been doing better still. The $7 million (MPYMX)Metzler/Payden European Emerging Markets fund and the $54 million (VEEEX)Eastern European Equity fund rose 53% and 49% respectively in 2004.

For all those impressive results, though, investors in exchange-traded funds are stuck on the outside looking in. None of the big three ETF houses -- Barclays, State Street and Bank of New York -- offers a so-called exchange-traded fund that tracks the leading regional index, the MSCI Emerging Markets Eastern European Index. Nor has any created a country-specific index for these four nations.

Investors like ETFs because they afford a liquid and transparent way of investing in regions or sectors.

To be sure, there are some ETF plays that offer some limited exposure to the region. Barclays, the leader in international ETFs with more than $30 billion in assets, currently sponsors an iShares MSCI Emerging Markets (EEM) ETF. But it is heavy with Latin America and Asian companies, leaving a paltry 10% or so of its portfolio for Eastern European stocks. Likewise, the firm's iShares MSCI European Monetary Union Index ETF (EZU) excludes the eight Eastern European countries admitted last May to the European Union -- including the Czech Republic, Hungary and Poland -- because those nations don't yet use the euro as their primary currency.

A Barclays spokeswoman says the company hasn't seen enough demand to merit either an Eastern European or a country-based ETF. She says the firm "would be open to considering such a product if the market decides there's a need for one." State Street says it isn't planning one now either.