A Safer Way to Play Euro Emerging Markets

This column was originally published on RealMoney on Sept. 2 at 10:13 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

Unless you have been vacationing on a remote island for the last couple of years, you no doubt know there has been a resurgence in emerging-markets investing. We have seen the formation of new ETFs, a resurgence in demand for closed-end funds that invest in emerging markets and even the creation of neat acronyms, like B.R.I.C. (which stands for Brazil, Russia, India and China).

If you care about having a diversified portfolio, you need to learn about emerging markets. Clearly, those that have looked abroad may have reached the reasonable conclusion that emerging markets are too volatile. After all, the history of this asset class has been one of feast or famine.

In 1997, the world suffered through the Asian contagion and one year later Russia defaulted on a portion of its debt. While it has been a while since the Mexican peso crisis of the mid-1990s, would anyone be truly shocked if a country in Latin America had a blowup of some sort? However, emerging markets have a long track record offering very good returns with a low correlation to the U.S. stock market.

Central and Eastern Europe has been a white hot emerging market, but there is likely to be some volatility in this region for the foreseeable future. I believe Austria is a backdoor way to capture some of the benefit that could occur in this region without trying to find a good Estonian bank stock; Barclays offers the iShares Austria ( EWO) to capture the effect.

The region's expansion is focused primarily on offering much cheaper manufacturing costs than Western Europe. Wages in places like Slovakia are often 10% what they would be in Germany, for example, and as new factories are being built and old factories modernized, it is the Austrian banks that are financing this boom.

This stands to help the Austrian banks, the rest of the Austrian market and the economy.

EWO is a simple way to access the Austrian market and capture the effect that I believe has been lifting the Austrian market for a couple of years and that I think will continue for some time to come.

The ETF is benchmarked to the MSCI Austria index. EWO has a 21.3% weight in banks, with Erste Bank being the second largest component of the fund with a 16.5% weight. Erste just reported earnings on Aug. 1 that were up 21%, beating estimates. Earnings growth is expected to continue to be "robust," according to analyst Stefan-Michael Stalmann from Dresdner Kleinwort Wasserstein.

Without EWO, it would be very difficult for U.S. investors to access Austria's growth. There is only one NYSE-listed ADR, Telekom Austria ( TKA). The other ADRs trade on the bulletin board or pink sheets, which makes accessing them very difficult.

In general terms, if you believe that Austrian banks will continue to benefit from expansion in Eastern Europe, EWO is the path of least resistance.

Another nugget that makes Austria compelling is that for the last two years money from the national pension system has been systematically going into the stock market -- think social security privatization without all the small accounts. Because there's a constant buying demand for shares, this privatization has been a huge boon to other countries, like Chile, that have implemented it. It's already been a contributing factor to the run-up in Austria, and it should continue.

Another, less important catalyst is the anonymity with which Austria exists. Very few people talk about the country, but this is changing. Morgan Stanley ( MWD) just became the sixth international investment bank to set up shop in Vienna and more may follow. On July 29, CNBC Europe made a plea on the air for any firm investing in Austria to contact the network so they can begin to cover the market.

It's Not All Edelweis

Austria (and by extension EWO) has been steadily making new highs. The EWO is up 150% in the past two years, as opposed to most of Europe, which has been treading water. It is possible that the next move of 10% or more in the EWO is down.

Also, the largest component of the EWO is OMV, an oil company that has moved up about 200% in the last two years. If the energy sector has a substantial correction, I would expect OMV, and thus EWO, to participate to some degree.

Finally, Austria is a member of the European Union, and while growth across the region has been anemic, it has not held back Austria. That could change, but I believe that another reason Austria has done so well is because its economy is healthier than most of Europe. The best evidence of that is an unemployment rate of only 4.6% compared to 8.7% for the region (according to Bloomberg).

In sum, the tailwinds created by eastern European growth, systematic pension investment and the devotion of resources to Austria by more investment firms outweigh the potential risks outlined. To me, these themes are simple to grab on to and understand. Simple is often better.

P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to TheStreet.com RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.

At the time of publication, Nusbaum was long EWO personally and for clients, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., 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; click here to send him an email.

More from ETFs

The Fed Will Keep on Hiking Rates Until It Has 'Done Damage'

The Fed Will Keep on Hiking Rates Until It Has 'Done Damage'

Fed Will Keep Hiking Until It's Done Damage

Fed Will Keep Hiking Until It's Done Damage

Why IBUY Is the Best Retail ETF to Buy

Why IBUY Is the Best Retail ETF to Buy

3 Great Ideas for Retirement Income

3 Great Ideas for Retirement Income

3 Stocks for a Crash-Proof Portfolio

3 Stocks for a Crash-Proof Portfolio