Eastern Europe ETF Is Covered in Russian Oil

NEW YORK (TheStreet) -- The iShares Emerging Markets Eastern Europe Index Fund(ESR) was listed a few days ago to little fanfare. iShares has the largest, and had the first, emerging-market exchange traded fund with the iShares MSCI Emerging Markets ETF(EEM). Since then, the company has offered numerous specialized funds.

But the iShares Emerging Markets Eastern Europe Fund isn't the first of its kind. EG Shares sells such an ETF, and there is also the Market Vectors Russia ETF(RSX).

The country breakdown for the new iShares fund is Russia, 75%; Poland, 13%; Czech Republic, 6.4%; and Hungary, 6.1%. Energy is the biggest industry, with 52%; financials comprise 16%; materials accounts for 11%; and telecom makes up 10%.

Disappointingly, the fund has enormous positions in two stocks: Gazprom(OGZPY), 25%; and Lukoil(LUKOY), 10%. Lopsided funds are common with market-capitalization weightings, but one way to avoid that is to employ a modified market-cap weighting where, for example, no stock can exceed 10% of the fund.

The way it's structured, the fund has very little chance of rising if great things happen in Hungary but crude oil drops to $55.

Compare that approach with the Market Vectors Russia ETF. It's heavy in energy, at 50%, but the largest stock, Rosneft Oil, only accounts for 8.2% of the fund. There's nothing wrong with a fund that's grossly overweight in an industry. In that case, any fund that invests in Eastern Europe, including Russia, is going to be heaviest in that country because it's the biggest in the region, and its largest stocks are energy. Anyone interested in this type of fund would need to add up the energy weightings of every holding to ensure there's an appropriate exposure.