Eastern Europe ETF Is Covered in Russian Oil

It's problematic if a fund that invests in a volatile area, like Eastern Europe, puts 20% to 25% in one stock. Sector exposure is easily managed in the context of a diversified portfolio. While no one reasonably expects Gazprom to go the way of Yukos, not too many people would have expected Fannie Mae to disappear, either, but it did. And if the "impossible" happens to Gazprom, the iShares Emerging Markets Eastern Europe Fund will be unduly affected.

For a more reasonable assessment of the risk of this fund, it boils down to the price of crude oil. When crude oil dropped into the mid-$30s a year ago, Gazprom's U.S.-traded ADRs dropped from $61 to $12. Exacerbating the decline was the swift rise in the U.S. dollar. (An advance in the dollar, everything else being equal, is bad for foreign equity holdings.) As opposed to predicting whether oil will go down and the dollar will go up, it makes sense to simply realize that this is the biggest market risk for the iShares Emerging Markets Eastern Europe Index Fund.

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