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Woes have been pretty widespread in emerging markets lately, as countries from Indonesia to Turkey have seen their share prices tumble. These concerns have largely centered on currencies, debt levels, and current account deficits though, leaving some nations relatively unscathed in the process.

One such nation that has held up reasonably well as of late is Poland. The country’s markets have seen solid performances, though volatility has picked up in recent trading. And now, thanks to a recent change to the country’s pension program, Poland could be facing some trouble of its own.

Poland in Focus

The country has recently moved to ‘reform’ its pension program, focusing in on government bonds held by private pension funds. The Polish government will now take over and then cancel government bonds held by these privately managed funds, though they will not seize stocks while future contributions look to be voluntary (see Poland ETF Investing 101).

In addition, Polish pension funds will be banned from buying government debt, a segment that was a huge funding source of sovereign debt in the nation. In fact, according to Finance Ministry data via Bloomberg, 21% of the outstanding total of Polish government bonds were owned by the pension funds, close to 121 billion zloty or roughly $37 billion.

The state will then take these bonds and turn them into pension liabilities in the state-run social security system. So it can be helpful to think of this move as an accounting trick, or at least one that helps the Polish government obtain more control over its financial position by shifting liabilities to the social security system—where rates of return and payouts can easily be altered—instead of the government bond market—where changes are viewed extremely negatively by investors.  

Market Impact

Still, the move shook confidence in the Warsaw Stock Exchange, while some believe that the liquidity will be compromised, or that investors may want to sell out now that the program is voluntary. Stocks in the benchmark index closed lower by several percentage points, while yields on Polish debt also rose, despite the overall reduction in the country’s debt-to-GDP ratio (see all the European Equity ETFs here).  
The change also put into focus the two Poland ETFs that currently trade in the U.S., as these also declined on the day. Below, we highlight some of key details regarding these products and how they held up with this pension liability move:

iShares MSCI Poland Capped ETF (EPOL - ETF report)

EPOL is easily the most popular Poland ETF on the market, as it has over $270 million in AUM, and an average daily volume of 230,000 shares. The product tracks the MSCI Poland IMI 25/50 Index, charging 62 basis points a year from investors.

This produces a fund that holds 42 stocks in its basket, with a heavy concentration on financials (the top three are all financials and account for roughly 32% of the total assets on their own). Financials actually make up roughly half the portfolio, leaving 13% for both energy and materials, and then 9% for utilities.

Volume skyrocketed for the session, as more than 2.3 million shares moved hands, while shares of EPOL tumbled by roughly 4.5%. This helped to push the fund to more underperformance, as the ETF is now down about 8.3% over the past month (see instead 4 Outperforming ETFs Leading Europe Higher).

Market Vectors Poland ETF (PLND - ETF report)

The original Poland ETF, this product made its debut in November of 2009. The fund tracks the Market Vectors Poland Index, charging investors 61 basis points a year in fees for exposure.

The product holds 30 stocks in its basket, putting heavy weights into financials, as three of these take the top three spots in the fund. Furthermore, financials account for 40% of the total assets in the ETF, followed by a 15% allocation to energy, a 12% holding in utilities, and then 10% in materials.

PLND saw volume that was roughly two times a normal session, while the ETF lost about 4.6% of its value on the day. This moves the one month loss for PLND down to 8.3%, once again underperforming other broad benchmarks.



Bottom Line

Poland had been doing relatively well when compared to other big emerging markets, as many have fallen by the wayside thanks to internal pressures. However, the pain could now be coming for Poland thanks to a shift in the pension program in the country (read European ETFs: A Surge in Popularity?).

While the move is somewhat of an accounting trick, it could reduce domestic investment in the nation, even if it improves Poland’s headline debt-to-GDP ratio. So make sure to keep a close eye on Poland ETFs in the weeks ahead to see how they react to the fallout from the new change in this key segment of the country’s investing landscape.

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