NEW YORK (
) -- Americans are learning about the world, investing and otherwise. With exchange traded funds focusing on so-called frontier markets, investors' knowledge of countries is growing.
The most recent frontier-market ETF is the
Market Vectors Poland ETF
. There may be some disagreement as to whether Poland is more of an emerging market than a frontier market, but, either way, Poland hasn't been easily accessible till now.
The fund is dominated by the financial sector, with a 40% weighting. Energy is second at 14%, and industrials is third with 11%. The large weighting in financials may not seem ideal, but many single-country funds, especially from small countries, load up on banks. (By way of example,
iShares MSCI Singapore
is 49% financials and
GlobalX InterBolsa FTSE Colombia ETF
Individual holdings likely are unfamiliar. The ETF takes some large positions, though.
PKO Bank Polski
weighs in at 9.2%;
KGHM Polska Miedz
, a large miner of copper and silver, 8.3%; and
, 6.25%. Most countries have a large phone company that usually features prominently in the local index, and Telekomunikacja Polska seems a little underrepresented.
For anyone unfamiliar with Poland as an investment destination,
, the company behind the Market Vectors line of funds, provides a report entitled "The Investment Case for Poland." Among the catalysts cited are a young population eager to work, a gross domestic product rate that never contracted (meaning no recession), a relatively high interest rate (which could do well in a global, risk-seeking environment) and an economy "driven by domestic trends, not exports."
Supporting the assertion of Poland as a compelling investment destination,
has recommended going long the Polish zloty against the Japanese yen as one of its top trades for 2010 because the Polish currency is "clearly undervalued."
Still, there are fundamental issues looming as potential problems for Poland. First is guilt by association. Countries like Latvia and Estonia have had sensational headlines with threats of currency debasement and possible depressions contributing to the perception that the entire region is unstable. Poland has an issue with its budget deficit and is drawing criticism for relying too much on privatization of state-owned assets to offset the crunch.
Another issue that has hurt other countries in the past few years is consumer loans taken out in foreign currency. Iceland and Hungary have had problems with this. And while only 40% of consumer loans in Poland are in a foreign currency, compared with 80% in Hungary (as of the end of 2008), high rates in Poland versus low rates in euroland create the visibility for more euro or Swiss franc loans in Poland. The risk here is that if consumers take out loans in another currency and then the zloty drops against that currency, the borrowers will be unable to repay.
One last point is that Poland's benchmark
WIG 20 Index
has risen and fallen in line with the
, raising the question as to whether Poland is much of a diversification. For Poland to be worthy of investors' time and money, those crucial catalysts must come to fruition, and the country must differentiate itself from other countries in the region and, on a performance basis, from the U.S.
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;
to send him an email.