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Ukraine's Lesson for Investors: Know What's in Your ETFs


NEW YORK (TheStreet) -- The recent unrest in Ukraine offers an important lesson for investors: Know what's in the exchange-traded funds in your portfolio.

Last week's bloody protests killed scores of people and have led to the ouster of President Viktor Yanukovych. The country's parliament has appointed lawmaker Oleksandr Turchinov to take on the former president's duties until elections can be held in May, but there are fears the country may split in two.

At the root of the violence has been disagreement about whether the nation should move more toward the West as part of the European Union or align more closely with Russia.

Last week, Standard & Poor's lowered Ukraine's foreign currency rating to triple-C from triple-C-plus and warned that the government could default on its debt. This could spell trouble for emerging-market bond funds that have exposure to Ukraine debt.

According to, the largest emerging-market bond fund according is the iShares JP Morgan USD Emerging Market Bond ETF (EMB). It has a 3.25% weighting in the Ukraine. Other funds with exposure include PowerShares Emerging Markets Sovereign Debt Portfolio (PCY), which has a 3.97% exposure, and the iShares Emerging Markets High Yield Bond ETF (EMHY), which has slightly less than 3%.

Funds with no exposure include the WisdomTree Emerging Markets Local Debt Fund (ELD), the Market Vectors EM Local Currency Bond ETF (EMLC) and the suite of ETFs recently launched by Emerging Global Advisors.

The fund with the largest exposure to the Ukraine that I could find was the ProShares Short Term USD Emerging Markets Bond ETF (EMSH) which is a relatively small fund with $11 million in assets. It has a 10% weighting.

There is a bigger point here about how to use exchange-traded products as part of a diversified portfolio.

Investors who construct portfolios with funds that have narrower focuses than broad funds such as SPDR S&P 500 (SPY), iShares MSCI EAFE ETF (EFA) and  iShares Core Total US Bond Market ETF (AGG) must be willing to devote some time to understanding a fund's holdings and then monitoring those holdings for news like the default threat in the Ukraine.

Certainly no one can know now whether the Ukraine will default on any of its debt, but we do know that the large a fund's weighting in Ukrainian debt, the large the potential hit in a default.

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