) -- The

iShares Emerging Markets Eastern Europe Index Fund


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) - Get Report

. 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) - Get Report


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:



, 25%; and



, 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.

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.

At the time of publication, Roger Nusbaum had no positions in the securities mentioned.

Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;

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